By 2030 Europe is aiming to have 27% of energy market in renewable energy. On June 26 New York State was the 4th State in USA to commit to 50% use of renewables by 2030. Not to mention rapid growth of the Australian and Asian markets. Picking Alpha has asked Dan Gramza to comment on the relationship between Renewable Energy and Coal Markets.
Q.: On what parts of Renewable Energy value chain do we have fully developed future markets?
D.G.: At the present time, we do not have Renewable Energy futures markets.
How Soon are we going to trade Renewable Energy Futures? Why?
D.G.: It will take some time before we are trading Renewable Energy futures. Currently it is challenging to create a total Renewable Energy financial product. It would more likely be broken down by sectors such as solar, wind, geothermal, wave and biomass. To create a futures contract, Exchange Traded Fund (ETF) or an Exchange Traded Commodity (ETC) a sector cash market and a cash market index needs to be developed.
How advanced and diverse are the financial instruments for the Renewable Energy? Green bonds?
D.G.: Green bonds provide fixed income funding to support the costs of developing renewable energy resources and is expected to grow. Since 2008, the World Bank has issued about $8.5 billion in green bonds in 18 currencies, and the International Finance Corporation has issued $3.7 billion in green bonds.
The current primary source of financial instruments for Renewable Energy would be exchange listed individual stocks of companies involved in Renewable Energy such as major oil companies or utilities.
USA is an exporter of fossil fuel energy, how are the markets reacting to that?
D.G.: This change has not been disruptive to the markets. With more crude oil and natural gas being produced and exported, the profitability and stock prices of the energy producers can increase.
Do we have a coal Renaissance at the moment?
D.G.: The world is highly dependent on coal. China accounts for 50% of global coal demand and approximately 50% of coal production and influences global coal prices more than any other country.
In 2000, about 50% of coal demand was in Europe and North America, while Asia accounted for less than 50%. By 2015, Asia accounted for almost 75% of coal demand, and coal demand in Europe and North America declined below 25%. This demand shift will accelerate in the next years, according to the International Energy Agency (IEA).
How did the introduction and growth of renewable energy markets impact coal futures?
D.G.: One of the primary uses of coal is electricity generation. Renewable energy markets have had some impact on coal consumption. The largest impact on coal came from low-priced natural gas. The United States produces more electricity from natural gas than it does from coal. Coal ARA Argus/McCloskey futures decreased 67% from 2011 to 2016. Currently, these coal futures are 27% higher from the 2016 low. The expectation is for the sideways market that started in 2016 to continue in 2017.
Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains.