Opec takes the reins

Hello and welcome back to Energy Source.

Opec+ caught oil markets by surprise over the weekend with a big supply cut aimed at tightening markets and boosting prices. Brent crude popped as much as 8 per cent yesterday, but gave up some of those gains and closed the day up 6.3 per cent at $84.93 a barrel.

The attempt at shock and awe comes after an extended period of weakness in crude markets. Opec+ has watched oil inventories rise sharply in recent months amid faltering demand — and sentiment soured further after turmoil in the American banking sector renewed worries of an economic slowdown. Clearly the Saudis and other Opec+ leaders wanted to try to regain control over the market. Make sure you read David Sheppard’s analysis of the cuts.

For years, surging output from America’s shale patch put the cartel in a bind. Every time it tried to cut output, a flood of barrels from US producers ate into their market share while also keeping a lid on prices — a lose-lose proposition.

But when Opec+ leaders met with top shale producers in Houston at CERAWeek last month, all they heard was that shale growth was going to be slower this year no matter the price. That no doubt left Opec+ feeling emboldened.

The Saudis and others in Opec+ are using the regained influence to push oil prices higher than shale-era norms. The Saudis appear to want Brent prices to remain above $85 a barrel.

With that said, the past year has shown that there’s a ceiling on how high Opec+ can push prices up. When prices rise much above $100 a barrel, consumers start pushing back. Cranking prices up too high would also stoke inflation and risk a recession that could undermine Opec+. What’s clear is that this is Opec’s oil market again.

On to today’s newsletter, where Derek has an interview with the head of the International Renewable Energy Agency, who says the west needs a “Marshall Plan” for green investment in Africa. And Amanda breaks down what US president Joe Biden’s moves on electric vehicle subsidies means for sales.

Thanks for reading — Justin

What’s missing in global clean energy deployment

Clean energy deployment around the world is soaring — but it is still far short of what’s needed to meet the Paris climate goals. Plus, investment is concentrated in big economies such as the US, China and EU, when it needs to happen in poorer countries too. The World Bank and governments need to step up quickly.

Those were the takeaways from an interview last week with Francesco La Camera, head of the International Renewable Energy Agency. He was speaking after Irena issued a preview of its World Energy Transitions Outlook.

Among the report’s conclusions:

• Renewables accounted for 83 per cent of global power generation capacity last year, and their share of installed capacity has reached 40 per cent.

• But deployment must more than treble, to about 1,000 gigawatts per year, if the world is to restrict warming to 1.5C by 2030.

• Annual investment must almost quadruple, to $5tn a year — and be spread more widely: Africa accounted for just 1 per cent of additional capacity last year.

With mounting anxieties about energy security, surging demand for fossil fuels, and the onset of trade disputes around clean tech supply chains — all the subject of my column over the weekend — how does the world increase renewables investment quickly enough?

There needs to be a “new narrative” about “closing the gap”, La Camera said. It is part of the pitch Irena will make at the next UN climate conference this year, in the United Arab Emirates.

The obstacles slowing the energy transition, La Camera said, include insufficient grid capacity, insufficient policy direction and deficient institutional capacity and support — for things like skilling up workers.

“Universities are not preparing engineers for the new energy system,” he said.

La Camera, one of the world’s most seasoned climate diplomats, is convinced that COP28 in Dubai in November can restore some momentum to the fight against global warming.

“The most important exercise of the COP is the stocktaking,” he said. “So they will say first of all that we are not on track . . . the governments will admit formally that they have not fulfilled the promises of the Paris agreement. This will be very important because the COP cannot conclude like this. It will also [have to] say how to close the gap.”

On the agenda, he said, should be a “kind of Marshall Plan” for green investment in Africa, led by multinational investment institutions. To that end, he welcomed the changes at the top of the World Bank, where David Malpass — appointed president of the bank by former US leader Donald Trump — announced he would step down later this year following criticism of the institution’s response to climate change.

Several western countries have called for a rapid overhaul of the bank, post-Malpass, to increase its focus on global warming.

“The changes in leadership of the World Bank mean something. There is a political understanding that the multinational institutions should be doing more,” La Camera said. “They have to work on putting in place the condition for investment to be possible.”

Government direction would remain critical for the energy transition because the market was “failing”, La Camera said. “If the oil and gas companies are gaining extra money from this [energy] crisis, it’s up to governments to make this money go to the right place.” (Derek Brower)

Data Drill

The Biden administration on Friday released highly anticipated guidance on electric vehicle tax credits, cutting down the number of eligible vehicles while extending an olive branch to Europe in the subsidies dispute.

The landmark Inflation Reduction Act included a $7,500 consumer tax credit for EVs. To qualify for the full credit, a vehicle must be assembled and source half the value of its battery components in North America. Forty per cent of the value of its critical minerals must also be sourced domestically or from countries that have free trade agreements with the US. These thresholds are set to increase 10 per cent annually.

On Friday, the US Treasury announced that sourcing requirements would apply to vehicles starting on April 18. A senior administration official acknowledged that the rules would “reduce the number of electric vehicles currently eligible for the full credit in the short term” until domestic production increased.

Electric vehicles made up 9 per cent of all vehicle sales in the US in January, the second highest figure to date, according to Atlas Public Policy. Despite the reduction in eligible models, the think-tank does not expect the guidance to slow EV adoption.

The Treasury also took a lenient interpretation on key parts of the tax credit, broadening the definition of a free trade agreement to appease allies such as Japan and the EU, which lack a formal trade deal. Likewise, the guidance classified active electrode materials as critical minerals rather than battery components, opening up sourcing opportunities beyond North America.

“Treasury’s done as well as it could to produce rules that meet the statute and reflect the current market,” said John Bozzella, head of the Alliance for Automotive Innovation, the trade group representing the largest EV and battery manufacturers.

One big question left unanswered is what constitutes a connection to a foreign entity of concern. To qualify for the tax credit, the IRA stipulates that beginning in 2024, no components can be manufactured in countries that are considered foreign entities of concern, such as China, Russia, Iran and North Korea. From 2025, no critical minerals can be sourced from those countries either.

The Treasury delayed guidance for this provision until a later date, leaving the eligibility of high-profile deals with Chinese-affiliated companies, such as Ford’s $3.5bn battery plant with CATL technology up in the air.

“Kicking the can down the road . . . is not the best given how many battery manufacturers automakers need to kind of get a sense of what’s fair play,” said Corey Cantor, senior associate of electric vehicles at BloombergNEF, adding that the uncertainty risks delays in investment decisions and the development of the US supply chain. (Amanda Chu)

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.