carbon bubble

It’s not easy being an oil producer (why Europe should not envy the U.S.)

October 30, 2018 by Karel Beckman

ENERGY WATCH #3 - October 30, 2018

It’s not easy being an oil producer (why Europe should not envy the U.S.)

by Karel Beckman

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Canada sells its tar sands oil to the US at 19 dollar per barrel

The importance of building a successful domestic European battery industry cannot be underestimated.

It will be key to Europe’s economic and political position in the global economy of the future.

As the European Commission writes in its recent press release on the European Battery Alliance: “Batteries will be as essential to the automotive industry of the 21^st century as the combustion engine was in the 20^thcentury.”

As financial energy analyst Gerard Reid wrote on Energy Post in March 2017, in his article The Great Battery Race: “The coming of cheap and effective lithium-based batteries will cause the greatest changes in the energy and automobile sector since Henry Ford built the model T…. . As battery technology improves they will become critical components for powering our automobiles as well as become vital assets for our power system.”

Reid warned that whereas China had a clear strategy and battery roadmap, the same was lacking in Europe. That was of course before the European Commission launched its European Battery Alliance.

The crucial importance of a domestic EV and battery production capability was brought home in the past few weeks with the Khashoggi affair, which showed how risky – and morally unacceptable – relying on Saudi Arabia has become.

Saudi Arabia is of course the world’s most important player in the global oil market. Direct crude oil supplies from Saudi Arabia to Europe are actually rather limited: 37million tons in 2017 on total imports of 516 million tons, according to the BP Statistical Review of Energy. (Europe imported 170 million tons from Russia, 66 million tons from CIS countries like Kazakhstan and Azerbaijan, 53 million tons from East Africa, 52.8 million tons from West Africa, 51 million tons from Iraq.) Nevertheless, a major political crisis in Saudi Arabia would have a great impact on all oil markets.

Such a crisis is not impossible.

As political analyst Daniel Lazare writes on Consortium News, an independent investigative website, in an excellent analysis:

“The kingdom may be less stable than it appears. It was already in trouble when MbS [crown prince Mohammed bin Salman] began his rise in early 2015. The second generation of Al-Saud rulers appeared played out along with their economic model.

Adjusted for inflation, oil prices had fallen two-thirds since the 2008 financial crisis while the kingdom was as dependent on oil as ever despite forty years of lip service to the virtues of diversification. Corruption was out of control while unemployment continued to climb because young Saudis prefer to wait years for a no-show government sinecure instead of taking a private-sector job in which they might actually have to work. (Studies show that Saudi government employees put in only an hour’s worth of real labor per day.)

Internationally, the country found itself facing growing headwinds as Barack Obama firmed up his historic nuclear accord with Iran. Obama’s statement in April 2016 that Saudis needed to “share” the Middle East with its arch-rival to the north would come as a blow to a family that thought it could always count on unqualified U.S. support.

Oil was supposed to keep Saudi Arabia rich and powerful, but instead total reliance on it was threatening to eventually weaken it. Something had to be done, and King Salman, although only intermittently lucid, figured his 29-year-old son was the man. Shoving rivals aside – most notably cousin Muhammad bin Nayef, the prince in charge of combatting Al Qaeda – Muhammad bin Salman began grabbing the reins and issuing orders.

The results have been disastrous. Within weeks of being named minister of defense — his appointment as crown prince would take a few months longer — MbS launched an air war on Yemen that would soon turn into a classic quagmire, one that would cause as many as fifty thousand combat deaths, propel much of the country to the brink of starvation, and generate annual costs back home of $50 billion or more that the kingdom could no longer afford.

In June 2017, bin Salman imposed a quarantine of Qatar on the grounds of excessive cordiality with Iran and too close relations with the Muslim Brotherhood, but he was taken aback when the emirate showed that it could carry on despite the blockade. A few months later, MbS’ henchmen kidnapped Lebanese Prime Minister Saad Hariri and forced him to read a resignation speech on Saudi TV. But Hariri repudiated the speech as soon as he was back in Lebanon.

Every attempt to assert Saudi strength only underscored its growing weakness. Bin Salman rounded up two hundred of the kingdom’s richest princes and businessmen last November, herded them into the Riyadh Ritz-Carlton, and then, following beatings and torture, forced them to hand over $100 billion or more.

Capital flight accelerated as a consequence while foreign direct investment is now off eighty percent from 2016 levels. The crown prince unveiled a series of grandiose vanity projects – an entertainment park twice the size of Disneyworld, a $500-billion robot city known as Neom, and a tourist park the size of Belgium – but then had to put them on hold when his father blocked plans to privatize five percent of Saudi Aramco, which he had been counting on as a revenue source. He hiked gas prices by eighty percent and slapped on a five-percent sales tax, but then went on a Marie Antoinette-style spending spree, shelling out $550 million for a yacht, $450 million for a painting, and $300 million for a French chateau. Whatever the benefits of austerity, they were promptly undercut.

Now the torture, murder, and dismemberment of a dissident journalist in Istanbul has made matters many times worse. With MbS persona non grata across the globe, the kingdom’s political and economic isolation is as great as it has probably ever been. According to a report in the Paris daily Le Figaro, moves have begun to replace MbS as crown prince, second in line to the throne.”

In short, there is every reason, from an economic and political viewpoint – in addition to important moral and environmental reasons – for Europe to reduce its reliance on Saudi Arabian oil and oil in general. The future for Europe clearly lies in electrified transport.

One could think that the U.S. is in a better position than Europe, being a major – and growing – oil producer in its right. Yet, the U.S. position (which cannot be imitated in any case, as Europe does not have the same resources), may not be so enviable as it seems.

First of all, for the U.S. Saudi Arabia is a key partner for much more than its oil. Saudi Arabia forms the foundation of the U.S.’s geopolitical position in the Middle East.

“If the Saudi power structure were ever to crumble in the wake of the Khashoggi scandal, there would likely be chaos because there is no alternative to replace it”, writes Lazare. “The impact on the region would be significant. With its 55-percent Shi‘ite majority, Iraq is already in the Iranian orbit after the U.S. overthrow of Saddam; Qatar and Oman are on businesslike terms with Tehran, while Kuwait and the UAE could possibly reach an accommodation with Teheran as well.”

“The upshot would be an immense power shift in which the Persian Gulf could revert to being an Iranian lake. That’s probably why the United States and Israel will do everything in its power to prevent the House of Saud from falling.”

Lazare notes that “the consequences in terms of U.S. imperial interests would be nearly incalculable. For decades, America has used the Gulf to shape and direct its interests in the larger Eurasian economy. Thanks to trillions of dollars in military investment, the Saudis control the spigot through which roughly 24 percent of the world’s daily oil supply flows, much of it bound for such economic powerhouses as India, China, South Korea, and Japan. Should control pass to someone else, America would find its monopoly severely impaired. The effects would also be felt in Syria, where Israel is incensed by the Iranian presence. It would be even more so should the Saudi counterweight be removed.”

Thus, as Lazare makes clear, it is a mistake to think of Saudi Arabia as an essential oil supplier to the U.S. The country is an essential oil supplier to Asia – and that is why controlling Saudi Arabia is crucial to the U.S.’s geopolitical influence.

Perhaps Donald Trump should have been in less of a hurry to tear up the nuclear agreement with Iran.

Nor is the American shale oil miracle the simple success story that its supporters often make it out to be.

As the Institute for Energy Economics and Financial Analysis (IEEFA) points out in a recent analysis (“Energy Market Update: Red Flags on Fracking”), the U.S. shale oil and gas sector has been loss-making from the start and not even the recent oil price rise has changed this.

“Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June”, notes IEEFA.

Some of its key findings:

In the first half of 2018, U.S. fracking-focused oil and gas companies continued their eight-year losing streak.
The 33 small and mid-size exploration and production companies (E&Ps) we examined reported $3.9 billion in negative cash flows through June.
E&Ps dipped into cash reserves in the first half of the year to fund capital expenditures and shareholder payouts.

“These disappointing results come on the heels of a decade of bleak financial performance by the fracking sector, which has consistently failed to produce enough cash to satisfy its thirst for capital”, writes IEEFA.

“The industry instead has been forced time and again to raise new money from capital markets—racking up enormous long-term debts and creating growing frustration among investors. The sector has consistently spent more on drilling than it has generated from selling oil and gas.”

A similar story can be told for Canadian tar sands.

“At current prices, Canadian tar sands oil producers are losing money on every barrel of oil they dig out”, writes Justin Mikulka on DeSmog blog website in an interesting analysis. “Despite signs earlier this year the industry would turn profitable in 2018, a much more likely scenario at this point is a fourth straight year of losses.”

Producers are forced to keep cranking out product and selling it at a loss to cover the massive costs required to start one of these sprawling unconventional oil operations, notes Mikulka.

In fact, in June 2018 Canada “set a new record for exporting oil to the U.S., hitting well over three million barrels per day.”

If this sounds great, think again. Since the U.S. is currently the only major market for Canadian crude, and domestic U.S. supply is large, the Canadians are forced to sell at extremely low prices.

Source: U.S. Energy Information Administration

How low? In mid-October, Western Canadian Select (WCS) was $19 a barrel — approximately $50 a barrel cheaper than a barrel of the American oil standard known as Western Texas Intermediate (WTI)!

Yes, you are reading this correctly. Whereas oil prices exceed $70 a barrel on global markets, U.S. refiners are buying oil from Canada at $19 a barrel!

Yet even under these economic conditions, one company, Teck Resources, is proposing to build a new tar sands mining operation, notes Mikulka. “Projections estimate the cost to produce a barrel of oil at this operation will be around $85 a barrel.”

Another complicating factor, he notes, “is that even at such low prices, American refineries only want and need so much tar sands oil, which is a heavy, lower-quality oil. America is experiencing a boom in production of the light fracked crude oil from shale basins, which is not only more valuable to refineries but requires much lower transportation costs than importing crude from Alberta, the tar sands capital of North America.”

“To help extract itself from this difficult situation, Canada is looking to build pipelines, such as the still-uncertain Trans Mountain pipeline expansion, to transport its landlocked oil to tidewaters, where companies theoretically can sell the oil to Asia’s rapidly growing market.”

However, “Canada’s tar sands pipeline plans have several fatal flaws”, Mikulka points out. “The first is that tar sands oil is heavy and not the most desirable oil on the market. The second is that Canada is late to the game, with some rather formidable competition from the U.S., which is exporting oil to Asia at ever increasing rates, and also from the Middle East.”

“While Canada’s tar sands proven oil reserves are the third largest for any country in the world, Saudi Arabia holds the number two spot (Venezuela is number one). Unlike the stiff production costs Canadian tar sands operators face, Saudi Arabia has production costs in the range of $10 per barrel. Plus, Saudi Arabia is producing more desirable grades of oil and has easy access to ports, giving the country a strong competitive edge.”

So, the life of an oil producer can be hard. And it could get harder still.

The International Energy Agency concludes, in a new report, that “major oil and gas exporters face unprecedented challenges in the years ahead”.

Major oil and gas exporters “have weathered many upheavals in recent decades but a renewed commitment to reform and economic diversification will be vital to cope with the changing dynamics of global energy. These include rising production from new sources such as shale, uncertainties over the pace of oil demand growth and deployment of new energy technologies.”

The IEA examined six “resource-dependent economies that are pillars of global energy supply: Iraq, Nigeria, Russia, Saudi Arabia, United Arab Emirates and Venezuela. It assessed how they might fare to 2040 under a variety of price and policy scenarios.”

“The rollercoaster in oil prices over the last decade has brought into sharp relief the structural weaknesses in many of the major exporters”, notes the IEA. “Since 2014, the net income available from oil and gas has fallen by between 40% (in the case of Iraq) and 70% (in the case of Venezuela), with wide-ranging consequences for economic performance.”

“More than at any other point in recent history, fundamental changes to the development model of resource-rich countries look unavoidable,” said Fatih Birol, the IEA’s executive director. “Following through with the announced reform initiatives is essential, as failure to take adequate action would compound future risks for producer economies as well as for global markets.”

The IEA recommends six “key responses” that oil exporting countries should adopt:

capturing more domestic value from hydrocarbons, for example via petrochemicals
using natural gas as a means to support diversified growth
harnessing the large but under-utilised potential for renewable energy, especially solar
phasing out subsidies that encourage wasteful consumption
ensuring sufficient investment in the upstream (the ability to maintain oil and gas revenues at reasonable levels is vital for economic stability)
and playing a role in deploying new energy technologies, such as carbon capture, utilisation and storage

For Europe, not being a major oil and gas producer, the geopolitical shift resulting from the transformation to a low-carbon economy could in the end work out quite well.

Yet, the new global energy system, increasingly electrified, also represents “new threats”, as three researchers – Andreas Goldthau, Martin Keim andKirsten Westphal – from the German Institute for International and Security Affairs (SWP) in Berlin point out in a recent paper, the Geopolitics of Energy Transformation.

The energy transformation essentially implies a systemic shift, the effects of which must not be underestimated, they write.

Three factors are key in this context:

The energy transformation recalibrates value chains. In a low-hydrocarbon – i.e. decarbonised – energy system, the economic value is no longer generated primarily from the (fossil) resource. Rather, it is accrued at the stage of conversion into end-use energy and energy services. This, in turn, means that the ability to generate profits will hinge on the availability and use of low-carbon technologies.
The energy transformation will yield new energy spaces, defined by infrastructure, production chains, and industrial clusters. This spatial effect results from (geo-)technological change, for example in the shape of local micro grids or region-spanning super grids, such as those promoted by China’s Belt and Road Initiative.
Today’s focus still rests on individual sectors (i.e. electricity, buildings, transport, industry), each characterised by a dominant mix of (fossil) fuels. The future focus, by contrast, will be in sector coupling. Integrating electricity, heat, and mobility will reinforce the relocation and reconfiguration of energy spaces.

Decarbonisation promises a “security dividend”, notes the report. “If more energy is produced locally, this has an impact on the relations between producer, transit, and consumer countries, arguably rendering the latter less dependent on the former. This goes hand in hand with an increase in sovereignty over energy supply.”

“The electrification of the system also levels out the role of states in the international arena, as they all become “prosumers”, i.e. producers and consumers alike. In addition, states may well become part of an encompassing “grid community”. This obviously requires conscious political decisions, both with regard to the domestic expansion or importing of renewables and to common control and cooperation mechanisms for the exchange of electricity in the grid. A single grid implies that vulnerabilities and sensitivities are distributed among all participating parties.”

However, “securing these transformation dividends also comes with new risks and challenges. For instance, the electrification of the energy system is associated with considerable risks in the area of grid stability and cyber security.”

“Stranded assets” are also a growing risk. “Assets linked to fossil fuels represent up to 30 per cent of the capitalisation of international financial centres, such as the London Stock Exchange. Depending on the depreciation rate, this clearly will represent a systemic risk”, write the SWP researchers.

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Low carbon world will have lower financial risks – Dutch central bank warns investors of climate risks

October 16, 2018 by Karel Beckman

ENERGY WATCH #2 - October 16, 2018

Low carbon world will have lower financial risks – Dutch central bank warns investors of climate risks

by Karel Beckman

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Although there is a lot of discussion of whether and how we can limit warming to 1.5°C or 2°C, for the energy sector there is a much more important conclusion to be drawn from the latest IPCC report: drastic change will come, regardless of the exact climate change effects that change will have.

In an interesting article for The Beam, David Nelson of the Energy Finance programme of the Climate Policy Initiative (CPI), zooms in on the implications of the energy transition for capital markets.

“Even the most engaged energy pundits tend to gloss over what may be one of the biggest changes of all”, notes Nelson: “how we pay for and finance the energy we use, and what that may mean for the investors, industries, and companies that provide that energy.”

One important conclusion drawn by CPI is that “the total cost of the clean energy system will be significantly lower than the current fossil fuel driven energy system.” This finding, which confirms similar findings from technical consultancy DNV GL in its annual Energy Transition Outlook report, contradicts claims from oil industry executives and others that “we can’t afford the energy transition”.

However, Nelson does add that for the transition to be cost effective we need to change our financing structures. “If … we pursue the energy transition based on existing financing structures and markets, we could find ourselves with a bill that far exceeds current costs.”

To understand why, he adds, “we need to take a financial perspective on three key differences between our existing energy system and a future low carbon system.”

“First, investment and financial markets are all about risk and risk management, who is willing to take on risks, and how much they need to be paid to take on that risk. It may, at first, seem counterintuitive, but most of the investment involved in a low carbon energy system is intrinsically less risky than current fossil fuel related investments. Less risk means different investment vehicles and different investors, but also different market structures to manage those risks effectively.”

As an example, “energy companies can spend billions of dollars to drill 10,000 foot wells that might, or might not, produce oil. The value of that oil will rely on a market whose price depends on economic growth, how many other drillers have been successful, and even global political risk. The price could be US$30 per barrel, or it could be US$160. As an investor, I would take on these risks if they are well managed by the company, but I would want double digit, 10–15%, annual returns.”

“By contrast, the risk of building a wind or solar park is lower, and once the park is running, operating costs are much smaller and more predictable. The amount of wind or sunshine might vary, but the production risk is very small compared to oil exploration. Prices tend to vary mostly because oil, gas, or coal prices vary, influencing electricity markets. A world without fossil-fueled energy generation, or one designed to reflect the intrinsic risks of low carbon energy, would have much more stable electricity prices. And a world with greater electrification — which is one of the important pathways to a lower carbon economy — would have more stable energy prices.”

In fact, for an investor, “renewable energy investments look much more like bonds than the equity investment common to the fossil fuel industry”, notes Nelson. “We have found that in the long term renewable energy costs can be brought down by 15–20% per unit of energy, if we restructure the investment and corporate vehicles around the properties of renewable energy, rather than coal or gas.”

But “doing so requires a degree of financial innovation, including creating new types of investment portfolios to diversify risk, and investment concepts to manage development and repowering of the projects. Such a concept can enable investment into lower return, bond like structures for over 95% of the project cash flows while still achieving investment grade levels of risk. The lower cost of financing results in a lower cost of energy.”

The second difference between the existing financial system and a future one is that “lower carbon energy is often more local with less dependence on globally traded commodities such as oil, coal or gas”, notes Nelson. “Investing in a power plant that sells power to local urban residents in local currency in an emerging market is a very different investment proposition than investing in an oil platform selling in crude oil in dollars to the global market, even if the two are located 10 miles away from each other.”

Thus, “local investors, who are already exposed to local currency risk, are the natural investors. However, even though many emerging markets are developing significant investment capacity, our analysis suggests that as much as US$200 billion a year of investment will be needed from international sources to meet the future local currency investment needs of a low carbon energy system. Distributed generation also moves significant investment from investment banking to commercial banking. The true investor is now the homeowner deciding how to use their credit capacity, rather than the bank investing in energy.”

The third difference relates to the issue of stranded assets. Nelson notes that “stranded assets, where investments decline in value because they are no longer needed in the new energy landscape, is the transition risk that features most prominently in the minds of investors.”

It is true, he writes, that “tens of trillions of dollars of value are at risk, but a good portion of this risk lies with governments — in the loss of taxes, royalties, and value in state owned enterprises — rather than investors. Our models suggest that lower demand will keep fossil fuel prices much lower, indeed the decline in expected future prices for oil, gas and coal, is far more important to stranded value than in declines in output. However, lower fossil fuel prices will benefit consumers and economies. In fact, our analysis shows that when benefits to consumers and the lower cost of capital are taken into account, there could be a multi-trillion dollar net benefit to the global economy of the energy transition over the next two decades.”

According to Nelson, “with planning, well defined and executed transition paths, avoidance of investment in new assets that risk stranding, international support, and new financial tools and insurance products, the systemic impact of this concentration of risk can be avoided, allowing the global economy to enjoy the overall economic upside of a lower carbon economy, along with the clear environmental benefits.”

Nelson concludes that “CPI analysis suggests that the transition could have a significant impact on financial markets. Under current industry and investment models, governments and large energy companies would need to increase their annual investment by 20–30%. However, in a more optimal world, we have also found that global investment by both the public and large energy companies could fall 10–30%. Institutional investors, commercial lenders, new types of energy funds, and households will make up the difference. But this require new investment concepts, dedicated and well thought out transition mechanisms, and new energy market designs. The choice is ours to make.”

***

On 5 October, three days before the IPCC report came out, and four days before the court verdict in the Urgenda case (see Brussels Insider in this week’s edition), the Dutch central bank (De Nederlandsche Bank, DNB) issued a warning for investors in its semi-annual risk analysis report. It was aptly called: “Waterproof? An exploration of climate-related risks for the Dutch financial sector” (English press release here.)

In a way it echoes the article by Nelson on the Beam: it shows that low-carbon may be less expensive in the long term, certainly less risky.

The DNB report did not get much attention in the press, not even in the Netherlands, yet it must be regarded as highly significant. It was the first time DNB provided an in-depth analysis of the financial risks of climate change.

“Financial institutions must increasingly factor in the consequences of a changing climate and the transition to a carbon-neutral economy”, said DNB. The impact of climate change “can be felt increasingly strongly in a variety of areas, which is why DNB intends to embed climate-related risks more firmly in its supervision with the ultimate aim of ensuring sustainable financial stability”, noted the press release.

“Financial risks are already materialising in a number of areas”, said DNB. “For example, Dutch insurers will have to deal with an increasing claims burden as a result of climate-related damage. This in turn may lead to shock-induced price rises in premiums. Furthermore, climate change is making it more difficult to estimate the likelihood of extreme weather. Non-life insurers often use disaster models provided by external parties to estimate the claims burden resulting from extreme weather. While these models are highly advanced, they often do not address climate change trends that are specific to the Dutch situation. This may lead to an underestimation of actuarial risks.”

In addition, “The energy transition also leads to increasingly specific climate policies in various sectors of the economy. For example, France and the UK plan to end sales of diesel and petrol vehicles by 2040. In the Netherlands, all office buildings will be required by law to have at least a C level energy label as of 2023. This may affect the lettability and value of office buildings that do not meet this requirement. A sample check of commercial real estate portfolios in the Netherlands, including office buildings, revealed that around 46% of bank loans are secured with real estate collateral that has a poor energy label (levels D-G). Most financial institutions have not yet incorporated all relevant energy label data in their risk management systems.”

DNB notes that “the financial sector acknowledges climate-related risks, but more action is needed. In general, the Dutch financial sector is increasingly aware of climate-related risks and is taking steps in the right direction. For example, large banks have announced their intention to tighten the refinancing requirements for non-sustainable office buildings. Many large financial institutions are investigating their exposures to carbon-intensive sectors. Insurers too are increasingly aware of the consequences of climate change, as is clear from a recent report of the Dutch Association of Insurers. We also see that several insurers are addressing the uncertainties in their risk modelling by tightening reinsurance programmes.”

Additional steps still have to be taken, however, says DNB. “For example, institutions should apply more forward-looking methods in their risk management, such as scenario analyses. They must also make efforts to systematically identify climate-related risks and take relevant mitigating measures where necessary. This requires specific action. For example, financial institutions must take steps to incorporate relevant data on climate-related risks in their risk management systems to a greater extent. This includes making more efficient use of internal data as well as applying new risk indicators. In addition, insurers should take climate change adequately into account in their risk management and risk modelling.”

In the report DNB pledges that “as the supervisory authority, we will take the necessary steps to contribute to financial institutions’ adequate identification and control of climate-related risks. For example, we intend to embed climate-related risks more firmly in our supervisory approach and address them in our interviews with supervised institutions. We are also working on implementing and further developing climate stress tests. For example, we are currently conducting a climate-related stress test at non-life insurers and we are working on a stress test for transition risks.”

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California goes low-carb – but who is following?

September 4, 2018 by Karel Beckman

ENERGY WATCH #3 - September 4, 2018

California goes low-carb – but who is following?

by Karel Beckman

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On 28 August, the California Assembly passed a bill requiring 100% of the state’s electricity to come from carbon-free sources by the end of 2045.

This is not small beer! California is the fifth economy of the world. Given the size of California’s economy and the bill’s ambitions, it “would be the most important climate law in US history,” said Danny Cullenward, an energy economist and lawyer at the Carnegie Institution for Science.

Severin Borenstein, an energy economist at the University of California, Berkeley, said: “California is effectively acting as a test bed for what’s technically achievable, providing a massive market for the rollout of clean-energy technologies and building a body of knowledge that other states and nations can leverage”, according to a report in MIT Technology Review. “We are showing that you can operate a grid with high levels of intermittent renewables. That’s something that can be exported to the rest of the world.”

Analysts believe California could reach 50% carbon-free electricity already in 2020, after strong growth of solar and wind in the last few years:

Renewables progress in California has led to high rates for consumers, Borenstein admits, but he adds that “crucially, the rapid transformation occurred without wrecking California’s flourishing economy. The state’s gross domestic product climbed by $127 billion last year, making it the world’s fifth-largest economy.”

The critical question now is: “Can the state’s grid get to 100 percent clean energy as affordably and reliably?”

“Many energy researchers believe the second half of California’s clean-energy puzzle will be considerably more difficult, and expensive, to solve than the first”, notes MIT. “Back in 2002, California got off the starting block with a fair amount of existing wind, geothermal, hydroelectric, biomass, and solar thermal power. From this point forward, every additional percentage point of clean power needs to be built from scratch. In addition, the state plans to close its last nuclear plant in the coming years, eliminating a carbon-free source that provides about 10 percent of the state’s electricity.”

And then there is the intermittency challenge. “As renewables come to represent a larger portion of the state’s total electricity generation, managing that intermittency could become increasingly costly and complex. ‘The amount of effort to achieve the last 20 percent might well be as much as it took the reach the first 80,’ Jane Long, a former associate director at Lawrence Livermore National Laboratory and energy researcher who has closely studied the mix of technologies that could be required to meet California’s emissions goals, said in an email.”

“Among other things, it could require expensive investments in energy storage, politically tricky expansions of transmission infrastructure, or greater reliance on controversial carbon-free sources like advanced nuclear, or fossil-fuel plants coupled with carbon-capture.”

Some are more optimistic, notes the article. “Daniel Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, argues that it won’t be increasingly challenging to reach California’s next set of goals. Among other things, he believes we’re sure to see the necessary energy storage advances in the years to come and says the state has yet to harvest other low-hanging fruit, like using electric vehicles as a form of distributed storage.”

“Moreover, Kammen says we’ll see a pronounced shift toward the ‘low-carbon lifestyles’ embraced by younger citizens in the next few decades, as the state increasingly plans cities around dense housing and public transit rather than single-family homes and cars.”

***

Californians may be going for a “low-carbon lifestyle”, and they may be thinking they are setting the example for the rest of the world, but who is following?

The Atlantic journal spots a trend in the opposite direction, in a recent article by Robinson Meyer entitled “The global rightward shift on climate change”.

Meyer spots an “emerging pattern” in the world: “Moderate national leaders—on both the center-left and center-right—in some of the world’s richest and most advanced countries are finding it far easier to talk about climate change than to actually fight it.”

“At a basic level, this pattern holds up, well, everywhere”, notes Meyer. “Every country except the United States supports the Paris Agreement on climate change. But no major developed country is on track to meet its Paris climate goals, according to the Climate Action Tracker, an independent analysis produced by three European research organizations. Even Germany, Japan, and the United Kingdom—where right-wing governments have made combatting climate change a national priority—seem likely to miss their goals.”

He mentions the Australian political crisis as just the most recent example.

Canada is another country that has a problem keeping up its climate commitments – partly as a result of the influence of the U.S.: “After winning the election, Trudeau took a compromise strategy on fossil fuels, proposing an economy-wide carbon price while endorsing the construction of several massive new oil-export pipelines. Two years later, Trudeau’s carbon-pricing scheme is in trouble. The government has already slashed the ambition of its initial proposal. The Conservative Party, which opposes Trudeau, has dubbed the carbon price a “tax on everything” and its leader says a future government would repeal any carbon price. The new premier of Ontario, Canada’s most populous province, says he will fight the carbon price when it takes effect in January of next year.”

***

Meyer could also have mentioned France, where Nicolas Hulot, minister for ecological transition, last week threw in the towel, saying he did not believe anymore in the Macron government’s climate ambitions. Hulot, a famous green activist in France, apparently quit also over disagreement in nuclear policy. He said France is continuing with “nuclear, that useless craziness, [both[ economically and technically”.

The French newspaper Les Echos has reported that a report commissioned by France’s government proposed building five new nuclear reactors.

And he could have mentioned Russia, but that is less of a surprise. Reuters reports that president Putin has urged Russian energy companies to expand their export infrastructure and boost exports of energy, including coal.

Speaking at a meeting with government officials and top managers of energy companies, Putin also said rivalry on global energy markets has heated up, notes Reuters.

“The current business environment allows for Russia to expand its exposure to the global coal market, to strengthen its position and raise its market share,” Putin said at a meeting in Siberian city of Kemerovo, one of Russia’s coal mining centres.

Russia is the world’s third largest coal exporter and is seeking to double coal exports to Asia by 2025.

Speaking at the same meeting, Russian Energy Minister Alexander Novak said that Russia plans to produce around 420 million tonnes of coal this year, surpassing a Soviet record high. Coal exports stand at around 200 million tonnes – equally split between both Western and Eastern directions, Novak said.

Putin did add that “the Russian coal industry should take care not to harm the environment when expanding.”

Yeah, sure.

Of course it’s easy to blame Putin, but he is only following the example set by the U.S. of course, which last year boosted coal exports by 61% to 97 million tons.

***

Apparently, the idea that climate action could deliver economic benefits, as the Global Commission on the Economy and Climate claims in a new report (to be published on 5 September), has not yet convinced political leaders. Or perhaps they find it too politically risky to go against the short-term interests of the people, because the Global Commission does call on them to “ramp up efforts on carbon pricing” and “accelerate investment in sustainable infrastructure”.

I have to admit that I do have some sympathy for world leaders here. I find the conclusion reached by the Global Commission (“set up by Colombia, Ethiopia, Indonesia, Norway, South Korea, Sweden and the United Kingdom – as an independent initiative to report to the international community”), that “bold climate action could deliver $26 trillion to 2030”, a little bit too convenient.

Who is ever going to be able to check on a figure like that? Why even pretend that you can put such an exact figure on “climate benefits”? And why does no Commission – whether for or against climate action – ever seem to come out with research that reaches conclusions running counter to their own beliefs?

Nevertheless, it does seem clear that for the moment the world can’t count on national leaders to take decisive climate action.

***

Not all may be lost, though. Local and private initiatives may come the rescue.

Yet another new report, this one from Data-Driven Yale, NewClimate Institute, PBL Netherlands Environmental Assessment Agency, and the Carbon Disclosure Project, finds that “action by cities, states, regions and business can go a long way towards meeting the goals of the Paris Climate Agreement, but their actions alone are not enough to hold global temperature increase to well-below 2°C and work towards limiting it to 1.5° C.”

In a press release the institutes describe their report as “the most comprehensive assessment to date of city, region, and company commitments to reduce greenhouse gases.”

Key findings from the report include:

By 2030, global greenhouse gas emissions could be 1.5 to 2.2 GtCO₂e/year lower if individual commitments from nearly 6,000 cities, states and regions, and over 2,000 companies are fully implemented, compared to what would be achieved through national policies that are currently underway. This potential reduction amounts to roughly double Canada’s greenhouse gas emissions in 2016.
In the United States, where President Trump has announced his intent to withdraw from the Paris Agreement, the full implementation of the reported and quantified individual city, region, and company commitments could provide at least half (between 670 and 810MtCO₂e/year in 2030) of the emissions reductions needed to meet America’s Paris pledge.
In the European Union, city, region and company commitments could reduce greenhouse gas emissions by 230 to 445 MtCO₂e/year, roughly equivalent to Italy’s greenhouse gas emissions in 2016. In China, these actions could reduce emissions by up to 155 MtCO₂e, roughly equivalent to what the country’s industrial processes generated in 2014.

The analysis only includes recorded, quantified commitments, so the true figure could come out higher – but it could also be lower, if the commitments aren’t kept.

***

With regard to climate action by business, Facebook is the latest prominent company to promise to be 100% powered by renewables, already by 2020.

Among financial investors the fossil fuel divestment movement has been growing stronger. Some are skeptical about the potential of divestment to affect the activities of fossil fuel companies, but according to the Institute for Energy Economics & Financial Analysis (IEEFA) divestment works.

In a 10-point “primer” it attempts to answer some basic questions and expose some myths about divestment. Perhaps the best argument for divestment is that, as IEEFA notes, “the fossil fuel industry doesn’t lead the market liked it used to. It lags. Energy was the worst performing sector in the S&P 500 Index last year, and its cumulative returns over the past five years have been abysmal. The chart below shows the trend. Fossil fuel investments’ volatile revenues, limited growth, and a negative outlook as the quality of its equities continues to deteriorate from the quintessential blue chip component of investment portfolios to one that is speculative and tied to the oil-price uncertainty.”

That should convince some investors.

However, don’t get your hopes up too soon. The Financial Times reports that UK local government pension funds have invested £9bn in fracking companies in the UK, “despite fierce debate over shale gas exploration. One third of the British public said they were opposed to fracking in a poll last year, compared to 16% in favour. The council of Lancashire, a region that is a “hotbed” of anti-fracking protests, is among the authorities with a portion of their pension fund exposed to fracking.”

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“The biggest carbon supply squeeze Europe has ever seen” could lead to a gas boom – and crisis in coal mining regions

September 4, 2018 by Karel Beckman

ENERGY WATCH #4 - September 4, 2018

“The biggest carbon supply squeeze Europe has ever seen” could lead to a gas boom – and crisis in coal mining regions

by Karel Beckman

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Miners in Poland protest against planned closure of mines

The Carbon Tracker Initiative – the UK-based think tank which popularized the terms “carbon bubble” and “stranded assets” – reports that “The EU carbon market has been the hottest commodity market in the world over the last 16 months, with the price of European carbon allowances (EUAs) up 310% since May 2017, 120% since the start of the year.”

The price rice has been “driven by the market’s anticipation of the start-up from January 2019 of the Market Stability Reserve (MSR), the centrepiece of the EU-ETS reform agreed last year. With only five months to go before the MSR starts reducing the over-supply of EUAs [carbon allowances] by 24% of the outstanding cumulative surplus each year over 2019-2023, the market is now counting down to the biggest supply squeeze the EU-ETS has ever seen”, writes CTI.

In a new report, called Carbon Countdown, CTI tries “to model the amount of emissions reductions that can occur from fuel switching and energy-efficiency savings over 2019-23 if EUA prices rise to levels that flip the merit order and enable gas to run ahead of coal across the EU.”

“The logic of our argument”, writes CTI, “is that the supply squeeze caused by the MSR over 2019-23 will create a cumulative deficit for the power and aviation sectors over these five years of ~ 1.4bn tonnes, and that in order to clear the market over this period power generators will have to reduce emissions via switching from coal to gas.”

The report concludes “that in order to achieve the level of fuel-switching required to clear the market over 2019-23 it will be necessary for combined-cycle gas-turbine plants (CCGTs) with a thermal efficiency rate of 45% and above to displace coal plants with thermal efficiencies of 38% and below. With the fuel-switching price very sensitive to efficiency rates, then other things being equal this implies higher EUA prices than we imputed from our modelling in our previous report, Carbon Clampdown.”

CTI stresses that its projection for 2019-2023 is subject to many uncertainties, relating to:

exactly how much abatement might be required over 2019-23
the amount and availability of CCGTs with the required efficiency levels
the evolution of commodity prices between now and 2021, the EUA price required to plug generators’ and airlines’ forward-hedging gap could be higher or lower than the levels imputed from our modelling

CTI also notes that “it is important to remember that the EU-ETS is ultimately a political construct, and there is therefore always a political dimension to EUA prices. This is not only because of the impact of CO2 prices themselves on EU industry – after all, industry is largely protected from high prices at the moment owing to its accumulated surplus of EUAs and to the fact that it is still receiving the vast amount of its EUAs for free – but also because higher CO2 prices will raise power prices for both industry and households. Accordingly, we also provide a reminder in this report of the measures that could be taken under existing legislation – i.e. before the scheduled review of the MSR in 2021 – to smooth the impact of lower auction volumes when the MSR is at its peak over 2019-21.”

In case you are wondering what exactly the Market Stability Reserve (MSR) is about, the CTI report has a very useful infographic that sums it all up:

***

Whatever the exact amount of coal-to-gas switching that we will see, it is clear that the rising CO2 price spells trouble for the coal sector.

That is not a big surprise. The European Commission’s Joint Research Centre published a report at the end of June, on the EU coal regions, noting that around 160,000 jobs of the half million jobs may be lost in the European coal sector by 2030.

The report contains interesting facts and figures and draws some important conclusions. Here some highlights:

Coal today accounts for 16% of gross inland energy consumption in the EU, and 24% of the power generation mix.

Six countries still rely on coal to meet at least 20% of their energy demand.

The role of coal is, however, decreasing, as part of the ongoing transformation of the energy system. The need to reduce greenhouse gas emissions has led to an increasing share for renewables; and coal power generation is actively discouraged with stringent post-2020 emission requirements, high CO2 emission allowance prices, and likely restrictions on coal eligibility for future capacity remuneration mechanisms.

There are currently 207 coal-fired power plants in 21 Member States … with a total capacity of almost 150 GW (15% of total European power generation capacity); and 128 coal mines in 12 Member States and 41 regions with a combined annual production of approximately 500 million tonnes (55% of gross EU consumption).

It is estimated that the coal sector currently employs about 237,000 people. The vast majority work in coal mining (185 000). Poland employs about half of the coal workforce, followed by Germany, the Czech Republic, Romania, Bulgaria, Greece and Spain. Twenty regions account for nearly 200,000 direct coal-related jobs. Six of these regions are in Poland (including the region of Silesia with an estimated 82 500 jobs in 2015) and another five in Germany.

Throughout the coal value chain the number of indirect jobs dependent on coal activities is up to 215,000, with four regions in Poland, Bulgaria and Czech Republic presenting above 10,000 jobs each. Many of these jobs will become redundant in the next decade, both in direct and indirect coal activities.

The vast majority of coal-fired plants in Europe were commissioned more than 30 years ago. These plants are on average 35 years old, with an estimated efficiency of 35%, well below the current state of the art. The first wave of power plant retirements will take place in the period 2020-2025, driven by competition in a carbon-constrained world. This could lead to the loss of 15,000 direct jobs in power plants.

The countries hit hardest are likely to be the UK, Germany, Poland, the Czech Republic and Spain. A second decommissioning wave between 2025 and 2030 could cause the loss of another 18,000 jobs, mainly in Germany, Poland, UK, Bulgaria and Romania. By then, approximately two thirds of the current coal-fired power generation capacity will have been retired.
Carbon capture and storage (CCS) as a mitigation option to reduce CO2 emissions could facilitate the continuity of operation of retrofitted coal plants in the longer term provided it is economically viable and that legal and regulatory challenges are overcome. Preliminary estimations indicate that roughly 13% of European capacity can be retrofitted with CCS.

Coal mines are already closing down due to a lack of competitiveness. In 2014-2017, 27 mines were closed across Germany, Poland, the Czech Republic, Hungary, Romania, Slovakia, Slovenia and the United Kingdom. In 2018, 5 more will close in Germany, Poland Romania and Italy. Further 26 mines are expected to close in Spain. Taking into account criteria, including mine productivity, depth of operation and product quality, it is estimated that coal mines in Romania, Slovakia, Spain, the Czech Republic, Germany, Italy, Poland, Slovenia and the United Kingdom could close in the short to medium term. Overall, it is estimated that about 109 000 mining jobs are exposed to high risk due to a lack of competitiveness.

In regions with mining infrastructure the dependency on the coal industry resulted in limited development of other economic sectors – most coal regions have a lower GDP/capita than the national average.

The decline in coal-related activities will also affect other sectors of the economy. The European iron and steel sector relies on domestic coking coal – a critical raw material for the European economy – to meet 37% of its needs. Hard coal mines capable of producing this type of coal could continue to operate purely by serving this sector, as long as coking coal prices are sufficient enough to sustain mining operations.

According to the JRC, “the retirement of coal assets should be coupled with a strategically planned and gradual industrial restructuring process, aiming to support redundant coal workers. New employment and business opportunities can be created by building on the industrial heritage of the affected regions and establishing new, competitive industries and services.”

***

What also will not come as a surprise is that not everyone is ready to accept the end of the coal era in Europe.

The Polish electricity industry association PKEE has reacted fairly critically to the JRC report. In a press statement released on 30 August, the PKEE notes that “The assumption of decommissioning ca. 70% of coal-fired power plants’ installed capacity in Poland by 2030 is at the same time completely unrealistic. Its fulfilment would result in a serious threat to energy supply security. This would result in the entire Polish economy having to pay the cost of implementing the decarbonisation policy.”

Overall, the European Commission’s Report “minimises the impact assessment of the negative consequences of the coal sector restructuring that will affect mainly local communities”, says the PKEE. “The Report fails to indicate well-justified proposals for remedial measures and at the same time ignores the consequences such as depopulation of coal regions as a result of migration, loss of human capital or increase in poverty. The Report leads to the conclusion that it will be local communities which will pay the most for meeting obligations, benefits of which will be distributed on a global scale. Therefore a just distribution of the costs of decarbonisation coupled with sources of financing adequate to the scale of the identified challenges should be a necessary precondition of the transformation to a “green” EU economy.”

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