The top ten stories from the drama of the Paris Climate Summit in December and its aftermath through to end February are, I think, as follows, as things stand. Key policymakers are now serious about climate risk. Civil society has awoken in critical mass. Regulators are beginning to regulate climate risk. Disruption is moving faster than most people think. Utilities are racing to escape a death spiral. The shale boom is going bust. The oil and gas industry faces the prospect of a death spiral too. Divestment from the energy incumbency threatens to snowball. Investor engagement with the incumbency, in concert with unfavourable economics, will soon threaten most capital expenditure on fossil-fuel expansion. The legal system is fast becoming a driver for the global energy transition.
How did these stories – unique but interwoven dramas across the narrative arc of my book The Winning of The Carbon War – evolve in February?
- Key policymakers are now serious about climate risk
In my book, I described how vital the seriousness-of-intent of the world’s two largest emitters was in the run up to Paris, and at the summit itself. This continues two months into the post-Paris world.
China is on course to far outstrip its Paris targets. Its 2015 Statistical Communique shows that coal consumption fell 3.7% in 2015. The energy intensity of the Chinese economy fell 5.6%. Coal imports fell 29.9%. Grid-connected solar power grew 73.7%, reaching 43 gigawatts of installed capacity. Grid-connected wind grew 33.5%, reaching an installed capacity of 129 gigawatts. It looks as though total CO2 emissions may have peaked in 2014, fully 16 years ahead of the national 2030 target. The Beijing government is cutting 1.8 million jobs in coal and steel, 15% of the combined total, and allocating £10bn to the relocation of workers. This is an effort to manage change at the total-systems level.
In the US, President Obama maintains course with his emissions-cutting Clean Power Plan. Incumbency interests have tried to stall the Environmental Protection Agency’s execution of the President’s strategy, including with legal action by fossil-fuel states, and they may have won a slowdown after a Supreme Court decision in their favour. But meanwhile, enough progressive states and utility executives seem intent on transition anyway that the incumbency’s self-defence may become academic. In addition, the President has instigated other initiatives in pursuit of his legacy. In the wake of the low oil prices, he is proposing a $10 per barrel fee on oil in his budget request to Congress. The request includes significant funding increases to regulators, and for clean energy research, as he tries to craft a climate-smart economy.
Other governments are not performing as well as the two responsible for 40% of global emissions, notably the UK. But global progress, in my view, is clearly net positive to date.
- Civil society has awoken in critical mass
In the closing chapters of my book, I argue that governments could not have adopted the “teeth” in the Paris Agreement – the so-called “ratchet” mechanism, linked to tough targets – without being egged on by most relevant sectors of civil society, in a “groundswell” of progressive action at the Paris summit and in the run up to it. Much of that groundswell continues, though you would hardly know it watching mainstream media like the BBC. It is summarised on websites including Climate Home. For an uplifting summary of the case for optimism on climate-change action, majoring on civil society action, see Al Gore’s TED presentation this month.
- Regulators are beginning to regulate climate risk
Mark Carney and Michael Bloomberg were key players in Paris. Carney, the Governor of the Bank of England and the Chairman of the Financial Stability Board, is the man most responsible for the stability of the global capital markets. He intends to ensure investors are provided with the right information so that they can respond to the risks of climate change, and the threat of stranded assets, by switching capital from fossil fuels to clean energy. Bloomberg agreed in Paris to Chair an elite committee of business leaders, the Task Force on Climate-related Financial Disclosures, that will make that happen. Behind closed doors, their deliberations are already underway. Investors are waiting, sensitised to the need for major change in the way the capital markets approach climate change. This will be a vital drama to follow this year and next. Expect significant diversion of capital away from fossil fuels as a consequence.
- Disruption is moving faster than most people think
Meanwhile, exciting news continues to flow for both renewables and storage. Renewables accounted for almost two-thirds of new US generating capacity in 2015, we learned in February: 3,500 times more than coal. Almost 8 gigawatts of new wind was installed, and more than 2 gigawatts of solar. Storage is heading for a breakthrough year globally in 2016, industry analyses suggest. Batteries lead the way, with an average price reduction of 35% in 2015. Other technologies are showing promise in development: splitting water to create hydrogen, compressing air in underground caverns, flywheels and more. Ongoing research points to good longer term bets such as supercapacitors and superconducting magnets.
Electric vehicles are very much part of the battery storage story, and this month a Bloomberg analyst went so far as to suggest another oil crash is coming, simply because EV sales are growing so fast that they will undermine demand for oil. EV sales grew by about 60 percent worldwide in 2015. That is approximately the annual growth rate that Tesla forecasts in sales through 2020, and the same growth rate that propelled the Ford Model T “horseless carriage” into displacing the horse-drawn carriage in the 1910s. For comparison, solar panels are growing at around 50 percent each year.
Incumbency defenders have tended to argue, notwithstanding the progress in storage, that the grid system will be too unstable if renewables grow too fast, and provision of baseload power will be a problem. UK National Grid chief executive Steve Holliday is not one such. “We are in the midst of nothing less than a revolution in the provision of our energy,” he wrote in February. 15 years ago, when he began his work with the grid, fewer than 50 power plants supplied electricity. Today, thousands of smaller generating stations do. Overlay smart grids, demand response and other technologies on this, Holliday says, and the energy system of the future must surely be much more flexible, cleaner and more efficient. With views like this, from a man in his position, centralised power plants and focus on baseload power begin to look very twentieth century.
- Utilities are racing to escape a death spiral
In the face of the previous story, and the zeitgeist of the post-Paris world, energy utilities are beginning to admit that their business models are dead. February 29th saw a new first: a national energy incumbency trade body doing the same. The CEO of Energy UK, lobbying organisation for the Big 6 utilities operating in Britain, explained that his organisation – long a staunch defender of fossil fuels – was now supportive of a coal phase out, and would be lobbying for clean energy. “No one wants to be running the next Nokia”, Lawrence Slade explained.
Meanwhile, France’s Engie set out a plan for dramatic increases in investment in renewables over the next three years, including a “massive deployment” of solar. Scottish Power also announced billions in new renewables investments. “Coal and gas generation is not making any money,” complained a representative.
Those thinking that nuclear might come to rescue are facing setbacks on an almost daily basis. The latest, on 29th February, was a decision by the EDF board to delay once again a final decision on whether to start building the £18bn Hinkley Point reactor. EDF is under enormous pressure to abandon the project, which is the centrepiece of UK government energy aspirations. Internal reports say it will be impossible to build within the 9 years agreed and would be a financial disaster for the company even if it could be built. EDF’s own workforce have pleaded with it not to go ahead, fearing the cost would bankrupt the company. There are elements of the global energy drama that fiction writers would struggle to invent, and this slow-motion crash of France’s flagship utility on nuclear rocks of its own making is one of them. Perhaps the vacillating EDF board should listen to the advice of Naoto Kan, Japanese Prime Minister at the time of the Fukushima disaster, on a trip to the UK in February: “If you love your country, let nuclear go.”
- The shale boom is going bust
We entered February with the low oil price accelerating the mothballing of active oil and gas drilling rigs in the US shale regions. The rig count is now down 70% from the peak in October 2014. Four of America’s shale gas regions had become void of all drilling. We left the month with junk-rated debt accumulated by oil companies in excess of $250bn, and debt issuance to the oil industry grinding to a halt. One estimate, by Morningstar, suggests that globally oil has to reach $65 a barrel to cover the average cost of supply. Brent crude in February averaged little above $30 and on two days averaged below $30. The IEA warned in February that the global glut is such that the oil price would stay low for some time. Dozens of oil and gas companies drilling in the US shale have gone bankrupt, and suspicions emerged that the number 2 US gas driller, Chesapeake, would join them.
A common refrain from economists is that the drop in oil production inevitably resulting from a reduction in drilling will force up the price and all will be well again in Oil and Gas Land. But will it? Bosses of drilling companies warn that it will take more than an oil rally to restart the shale boom. The oil services companies don’t easily recover from prolonged low prices. Their equipment tends to go unmaintained, is often cannibalized for spares, and many unemployed drillers move on to other industries, disillusioned. “They weren’t just cutting skin deep, they were cutting into the meat and then pretty quickly into the bone,” said one expert. “It’s not really like just turning on the light switch”, said the CEO of EOG Resources.
- The oil and gas industry faces the prospect of a death spiral too
Bankruptcy is not just a concern for shale drillers. The low oil price has meant that some $400bn of expected investment has been cancelled or delayed, to date. Morgan Stanley calculates that out of more than 230 projects ready to go this year, only nine are now realistic. And if you are not drilling for new oil and gas, and depleting existing reserves, how do you grow and generate cash in the future? Especially if, as we have seen, explosive growth of cars that need no oil is assaulting your market.
Energy economist Philip Verger suggests that “nightfall is coming” for big oil companies. Paul Spedding, an advisor to Carbon Tracker and former oil and gas analyst at HSBC, suggests that the oil industry may be in the process of stranding assets just like the coal industry has. “Demand for fossil fuels is likely to drop, which could result in prices remaining depressed for longer than the industry anticipates – perhaps forever”, he suggests.
Yet the industry seems perversely blind to all this risk. BP’s Energy Outlook, published this month, foresees fossil fuels providing 80% of primary energy in 2035, with oil and gas providing around half the demand growth they profess is inevitable. The other oil majors profess much the same.
- Divestment from the energy incumbency threatens to snowball
In my book, I charted the spectacular growth of the divestment movement, especially in the immediate run up to the Paris Climate Summit. Until that time, the industry tended to downplay the significance of pension funds, cities, religious groups, universities, teachers, doctors groups, foundations and others turning their backs on investment in their companies, saying the scale of the capital withdrawal was too small to make a difference. Institutions with well over $3 trillion of funds under management are now divested or pledged to do so, and the movement is growing. If anyone felt inclined to suggest that this isn’t a significant threat to the oil industry, it became more difficult for them to do so on February 25th, when Ali Al-Naimi, Saudi Arabia’s Minister of Petroleum & Mineral Resources, exhorted his industry to combat divestment. “We must not ignore the misguided campaign to ‘keep it in the ground’ and hope it will go away”, he said. “For too long the oil industry has been portrayed as the Dark Side, but it is not. It is a force, yes, but a force for good.”
In 2016, we will see investors voting with many billions of dollars on whether or not they agree with the Minister.
- Investor engagement with the incumbency, in concert with unfavourable economics, will soon threaten most capital expenditure on fossil-fuel expansion.
Investors who don’t divest give no free pass to oil and gas companies. The lesson of coal is there for all to see, and many investors have been badly burned by it. Share prices have collapsed spectacularly. Banks including Goldman Sachs have concluded that the coal industry is in structural decline. The bankruptcies to date include America’s second biggest miner, Arch Coal. Pressure is inevitably extending to the oil and gas industry. Executives are seeing previously unchallenged assertions and business models interrogated as never before. Given everything summarised above, how can this be expected to do anything but worsen in 2016?
The AGM season, after the financial year closes at the end of March, will make for fascinating watching. It looks as though investor engagement with the incumbency, in concert with oil-price pressure, will soon threaten most fossil-fuel capex. It would be a mistake, once again, to think a rising oil price will necessarily offer net help the incumbency. If oil production falls on a scale that allows supply to slip below demand, and the price soars as we know it can in those circumstances, this will only strengthen the case for clean energy and the flight of capital to it.
- The legal system is fast becoming a driver for the global energy transition
Potential historical malfeasance deepens the troubles of Big Oil. ExxonMobil is being investigated by the Attorney’s General of New York and California with a view to criminal charges for securities fraud and racketeering over their stance on climate change. Investigative journalists have found evidence suggesting that their peers behaved no differently. The ramifications are enormous for the course of the global energy transition. I describe how this story has unfolded in another blog this month.
This legal morass, with its potential for multiple class-action cases, would be bad enough on its own. Added to the nine other stories, it makes for a perfect storm for the oil and gas companies. Here is my prediction for 2016 and beyond, as things stand. As things stand, most fossil fuel companies face a future in which they might not have the capital to expand even if they still want to. This can only strengthen the chances of the Paris Agreement turning from intent-on-paper to execution-in-practice.