Energy
companies are finding they must Follow the Money
World records tumbled in renewable energy this month. Utilities,
facing short-term existential threat in the face of clean-energy growth,
continued to wrestle with the imperative of escaping the energy incumbency.
Oil and gas companies, facing longer term threat to
business-model viability, read dire assessments of their prospects in places
they could not have imagined possible until recently.
Investors continued to awaken to climate risk, and a critical
mass of governments stayed broadly on course for the current and future action
that the Paris Agreement requires of them. None of this, however, happened as
fast as the recent run of world-record monthly average
temperatures merits.
Unprecedented wildfires and die offs of coral reefs were
harsh reminders this month of the race against time that civilisation
is running.
The latest solar auction, in Dubai, saw a power plant proposal come in below 3 cents a kilowatt hour for the first time: cheaper than any other form of power today. It remains to be seen if such a plant can be built at a profit, but this world-first shows that the solar industry has a cost-down roadmap with yet more mileage in it.
The cost-down megatrends of solar and wind are driving solid
growth in grid penetration by renewables. Germany generated almost all its power from renewables one day in May.
Portugal managed four straight days of 100%
renewable power. UK energy from coal hit zero for first time in over 100 years
…several times in a week.
Growth
in jobs reflects the energy transition unfolding. We learned in May that more than 8 million people now
work in renewables. Solar photovoltaics is the biggest employer with
2.8 million, while 1.1 million work in wind. In the USA the 769,000-plus people
employed in renewables – on an upward trend of 20% in 2015 – dwarf the
187,000 in oil and gas and the 68,000 in coal mining, sectors that are
both on strong downward trends.
Storage
continues to race into the frame. Figures for 2015 showed fully half the small solar PV plants installed in
Germany were built with storage. This story involves far more than the
headlines generated in April by Tesla. For example, Nissan announced a residential battery product for
Europe, scheduled for a September launch.
Eon
and RWE, the two giant German utilities who have admitted their old business
model is dead, continue to pursue radical restructurings.
Analysts are questioning whether they will have strong enough
balance sheets to execute their u-turns.
In the US, a study for the Investor Responsibility Research
Center Institute showed that the top 25 investor-owned electric utilities spent over $400 million
lobbying against clean
energy in the past four years.
Had they deployed that capital embracing the future rather than
defending the past, they could have accelerated the revolution considerably.
For example, had they used the cash underwriting loans to ratepayers, they
could have doubled the nation’s solar capacity.
The
utilities’ wasteful defence of a failing status quo is as nothing compared to
that of the oil and gas industry’s. But the oil and gas giants are coming
under increasing pressure, and nowhere more so than on the risk that they are
heading for stranded assets.
The latest report from Carbon
Tracker calculated
that the oil majors would be worth more if they adapted their business models
to reflect a world in which governments actually succeed in their treaty
commitments to keep global warming below 2˚C.
ExxonMobil
and Chevron faced torrid times at their AGMs in May staving off shareholder
resolutions around stranded-asset risk. They won majorities, but for how much
longer can they?
A BBC headline suggested Exxon Mobil faces a “change or die” moment
on climate. The Royal Institution for International Affairs published an
analysis suggesting that the oil companies have ten years in which to change
strategy, or face a “short, brutish end”.
“Not-so-Big Oil”, read the headline of an Economist
article focusing on the evaporation of profits. The problems are not just
around climate and the debt mountain they are building. Oil discoveries slumped
to a 60-year low in 2015. The Financial Times summed up
in an editorial at the end of May under the headline: “The long twilight of the big
oil companies.” “Fossil fuel producers face a future of slow and
steady decline”, the leader writer argued.
Investors
are reacting, albeit slowly. A report by the Asset
Owners Disclosure Project showed
that 246 of the world’s 500 biggest investors, worth $14 trillion, are still
ignoring climate risk completely.
The AODP rates investor behaviour in the manner of ratings
agencies, in this case assessing engagement on climate risk, risk management,
and low-carbon investment. They distinguish classes from Leaders (A to AAA
grade) through to Bystanders (D grade) and Laggards (ungradeable).
The percentage of Leaders is growing slowly, but does not come
close to matching the urgency implicit in the work of regulators concerned
about stranded assets.
That said, the very fact that ratings are now being applied
should help unlock the floodgates. So should the work of the G20’s Taskforce on
Climate-related Financial Disclosure when it reports later this year. My
prediction: expect a stampede at some point soon. The capital markets are well
known for herd behaviour.
Total
is one oil and gas company that is making an effort, at least to hedge bets.
Total aims to have a fifth of its assets in low-carbon by 2036. Its latest move
is a billion euro acquisition of a
battery company, Saft Group.
During May, Total and the solar company it majority owns,
SunPower, announced a project to power Santiago’s metro with a 100 megawatt solar plant.
Serving 2.2 million passengers every day, this would be the first public
transportation system in the world to run mostly on solar energy.
On a personal note, I have often been assured by defenders of
the energy incumbency in London that “renewables can never run the tube
(metro).”
ExxonMobil,
meanwhile, dug further into their defence of the status quo. Their CEO told his
AGM that ending oil production was “not acceptable for humanity”.
Calpers, holding $1bn of ExxonMobil shares, was among the many who took a
different view: “This is their Kodak moment”, said
Anne Simpson, representing the giant Californian pension fund. “If they want to
still be in business in 30 years, they have to understand the changes that are
taking place.”
In
the UK, fracking of shale for gas won a council go-ahead for first time since 2011.
Here too scorn descended on the industry, not least because – unmentioned by
many UK press reports – bankruptcies among US shale frackers have now rising to
more than 70 in the face of a debt mountain that is raising fears in some
quarters of a new sub-prime crisis.
The FT’s Lex Column won first prize for imagery: “The idea
of the undead fascinates people”, Lex’s analyst wrote. “The cult following
still believes that fracking in the UK could be profitable. Investors should
allow market forces to finally kill it off.”
A
session of climate talks in Bonn was covered by less than 100 journalists,
compared to the 3,500 who attended the Paris Climate Summit. Almost unnoticed,
governments kept their climate show on the road, teeing up processes for
implementing the Paris Agreement that make success at this year’s climate
summit, in Marrakesh in December, more likely. At this point it looks
possible that the treaty will actually come into force earlier than negotiators
agreed in Paris.
There
can be little doubt that all players, governmental and
non-governmental, will have to move faster than they expected in Paris. The
global average temperature for April broke yet another world record.
Terrifyingly, twelve months in a row have now done so.
Unprecedented impacts accompanied the unprecedented heat, most notably a
uniquely ferocious wildfire in Canada that required the evacuation of Fort MacMurray,
a city that owes its existence to the tar sands.
More than half the coral on the northern Great Barrier Reef
appears to have been killed by bleaching in unsurvivably hot water.
For
those still resistant to the idea that the world is warming dangerously because
of greenhouse gas emissions, despite such evidence, there should be
another reason to worry now.
The largest coral reef in the continental US, off
Florida, is dissolving into the ocean in some areas. The acid doing the
damage comes from carbon dioxide from fossil fuel burning.
Then there should be
worries about air pollution, from the same source. The World Health
Organisation announced it is up 8% in last 5 years, and is now the single biggest killer in world.