The Global Energy Market’s Moment of Truth

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If you want to know what addressing climate change will really be like for business and investors, then take a look at today’s electricity and energy markets. Driven by climate policy, technology development, business innovation, NGO campaigns and investment risk analysis, creative destruction is inflicting itself upon the sector with a vengeance – and the process has just begun.

Value is being destroyed at an incredible scale with just one example being European utilities losing $750 billion in market cap in recent years. Another is the huge losses in value for coal companies and the cancellation of a large number of new coal mining projects around the world as the forecast growth in China and India evaporates. As I argued in my last Chronicle, Carbon Crash Solar Dawn, this is not a temporary market blip but a fundamental shift. Company strategies and business models that have been working for generations are collapsing. In parallel we see the creative side of the process, with new industries being built, entrepreneurs flourishing and massive wealth being created. Now the market is working, as it should, allocating capital to the places where risk and return are best aligned. It is at once a beautiful and brutal process to observe.

This is an important inflection point to acknowledge, with significant implications that should reframe our thinking about these issues.

For a start it means, climate policy and its economic consequences have now shifted from future forecasts to present reality. This reality, with all its brutality for existing businesses, give us important insights into what to expect as the world wakes up to climate change. Business is already waking up to what that means in a market economy – creative destruction unleashed to destroy slow responders.

This suggests that traditional corporate responsibility, which argued sustainability was good for all businesses, is outmoded and not helpful. We have moved into an era of win/lose rather than win/win, and with that, sustainability is shifting from ‘environmentalists vs business’ to ‘business vs business’ as I covered in this earlier Chronicle.

Taken together this means we need to change the way we talk and think about climate change and business. Sustainability is not good for many businesses – in fact it means they’ll have to go out of business. This is what sustainability at its core is all about – things that are unsustainable will stop.

While on the one hand this is blindingly obvious, it is a conversation many in business and politics don’t want to acknowledge. So when the previous Australian government brought in its carbon pricing scheme, it went to great lengths to argue that Australia would still have a healthy coal industry. And President Obama’s new regulations on CO2 emissions in the US power industry are likewise being positioned as being as much about health and air pollution as climate policy.

But as Michael Grunwald argues in this Time Magazine piece on “Obama’s War on Coal” – a phrase used by the coal industry to suggest this is unfair and unreasonable – it’s time to face up to the reality of climate action. It is a war on coal, pure and simple. Grunwald calls it the “just but undeclared war ”. But rather than “just” with its moral overtones, we could simply argue it is “necessary” based on any objective analysis of what’s good for the economy and for society. What is necessary is to move a range of companies out of the economy and replace them.

Coal is first in the firing line. As a major cause of CO2 emissions and with the lack of market support for Carbon Capture and Storage suggesting “clean coal” is either a delusion or at best an expensive PR campaign, coal simply has to go. That means coal companies will go out of business, and then oil companies and gas companies will follow them.

This is not a problem at all for the economy, as they will be replaced with new companies and new industries, which will create new jobs, new wealth and new innovations. But it is a major problem for the incumbents who will cease to exist and for their owners who will lose their money. Unless we have that conversation honestly and openly, we are setting ourselves up for pain and suffering we can easily avoid or at least minimise by thinking through the consequences and being better prepared for their departure.

Of course the best way to minimise the pain would be for fossil fuel companies to transition to new areas of business, to use the great wealth they have created to diversify into sustainable sources of profit. But most of them won’t. It’s not that they couldn’t – it’s just that they won’t. And it’s not just coal but also oil and gas who are, for the most part, in strong denial about what’s coming and so won’t be prepared, as well explained in this article by Giles Parkinson at RenewEconomy.

We shouldn’t be surprised. History shows how rare it is for companies to transform and survive major market and technology shifts. That’s why the average life expectancy of a successful multinational is only 40-50 years. And that’s why the financial markets – who act without ideology based on looking at the data – are rapidly responding. They are stripping value from fossil fuel exposed utilities and the resource companies that provide their fuel. They are also downgrading credit risk, with Barclays recently issuing a warning the investors should no longer see utilities as a “sturdy and defensive subset of the investment grade universe”. The report concluded: “We see near-term risks to credit from regulators and utilities falling behind the solar plus storage adoption curve.” No doubt Deutche Bank considered these risks when they recently announced they wouldn’t consider funding a major new coal port next to Australia’s Great Barrier Reef.

So while the idea of “war on coal” is in some ways an accurate summary of the momentous threats the industry faces from a range of forces that are consciously and deliberately coming after them, we could also just see this as how markets work.

Fossil fuels provide us with energy, but they also destroy value across the economy – by driving climate change, damaging health and increasing costs for taxpayers while imposing unmanageable risks on other companies who rely on a stable climate for their business success. So the market is simply doing its job, pricing in some of these costs using the proxies of regulatory, credit and technology risk.

The market is working …. and fossil fuels are losing.

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46 thoughts on “The Global Energy Market’s Moment of Truth

  1. Simon Giessauf

    Thanks Paul another great insight.
    I agree many businesses will not survive this shift that is currently underway, many have already reached their demise. It is also a disappointing fact that many of the existing incumbents will not have the vision, and or courage, to use their wealth to diversify into the new clean and sustainable industries that are going to shape our future.
    Simon from SA.

    • Leif Knutsen

      Why should those Fossil CEOs care what happens to their companies? They got theirs and the investors are just as expendable as the workers in reality.

      • I don’t wish to believe what you say (based on my first-hand experience). I do not agree with you that those you choose to call “fossil CEOs” are uncaring about what happens to their companies. Nothing I have learned or experienced in more than 40 years as a journalist would support that allegation.

        Hey, I’m not saying I haven’t met and written about “bad guys” in the energy industry. I just think your comment is wholly overboard and unfair and not true.

      • Leif Knutsen

        So are you saying that the heads of all Multi-National fossil corporations are innocently convinced that their practices are not significantly contributing to the world environmental carnage in spite of the best science the international community has to offer? If they are aware but ignore the realities in pursuit of the bottom line, they suborn mass suicide. Which looks to be the case IMO. Otherwise the heads of all these multi-billion $$$ corporations could not pass a high school science final. A very difficult pill to swallow.

        Corporations, at least in the USA , are “people” now and as such have a fiduciary responsibility to functioning Planetary life support systems, as do we all. Their long term actions clearly show that they could care less.

      • Believe Paul’s covered this elsewhere, expressing his surprise at meeting CEO’s on behalf of Greenpeace, finding that, rather than being nasty, they actually feel helpless, trapped between shareholders who want big $ returns, on one side, and governments on the other side, wanting growth in GDP and jobs. Poor old CEO’s eh?!?

  2. Leonie Stubbs

    G’day Paul,

    Thanks for the update. It will be interesting if the ‘stranded assets’ scenario will be taken seriously by the large energy companies. Whilst Exxon produced a stranded assets risk report it fell short of stating that shareholders would suffer instead suggesting that the global ‘social need for energy’ would prevail.

  3. Lynne Clarke

    Thanks Paul, how amazing we were just talking about the coal industry shares crashing and Obama’s tax on carbon push….I’ve pt in on my timeline…hope that’s ok. cheers Matey…so proud of you ….Lynne t

  4. Len Puglisi

    Paul – thank you. A helpful summary of the state of play.
    One additional comment: There are at least 2 meanings to the comment, ‘the market is working’. One is that there is activity, things are going on, etc…. The other is that the market is responding to all the influences on it, adjusting itself, and doing a good job.
    I have no problem with the first meaning, but I think the second is quite wrong. I think it would give succour to guys like Rupert Murdoch and all the others who follow his gospel at ‘the Australian’, and in the Parliament. That gospel he preached to an audience in Australia before the last election and was that the market is not only the most efficient but the most moral system. Clearly, that’s false – and your piece provdes good arguments that it is. So in summing up views about ‘the market working’, we have to make sure that we point out over and over again that the Murdoch et al. interpretation is a travesty of all moral thinking.

    • paulgilding

      Len
      Strongly agree with your comments here. As I expand on in my book, the market only ever “works” when regulation frames it. So the change underway now in the energy market is only underway because of government action, particularly in Germany but also EU more broadly, China, US and Australia etc to get solar to be competitive. Markets deliver change, they don’t drive it.
      Paul

      • Len Puglisi

        Paul – and in a further note regarding the necessary distinction to be kept in mind between global and local/urban factors when dealing with population growth: In today’s (Thurs, 19/6) ‘The Australian’, Bernard Salt (‘Spare us the battles’) criticises opponents of much property development. Salt is prepared to concede that ‘We all want better development, and not necessarily simply more development.’ But then he goes on to make what he thinks is a clincher argument against opponents of massive development as follows: ‘Although with overseas net migration now tracking 240,000 perannum up from a long-term average of 120,000 pa, “more development” is very much needed in our capital cities.’ So that’s what urban planners – most of whom to their shame have given in on opposing population growth – are up against: the argument that ‘it’s inevitable, so get with it.’ Heaven help our cities if this position prevails!

  5. Alarm bells have been ringing for decades; and there appears to be a lag time… “Business and Investors” is a big ship to turn with a lot of momentum. Here to making the turn w/o running aground.
    Cheers!

  6. Leif Knutsen

    The Fossil Barons are quick to point out the dilemma of “Stranded Assets” following environmental constraints on polluting the commons. The flip side is the “stranded assets” currently incurred by “We the People” in the mitigation costs of increasing forest firers, floods, storms, sea level rise, agriculture loses, acidified oceans, even lives should steps not be made stranding those fossil “assets” while there is still a chance for the survival of the kidders.

    The only “just war” is a war of the survival of humanity and Earth’s Life Support systems. Both under threat by our privatized profits, socialized lose paradigm and the ability of the few to profit from the pollution and exploitation of the commons. A “We All Win War,” WAWW, can, and in fact, must be fought on all fronts with the mantra of minimal death and maximum good to all life, starting with the poorest of the poor or closest to extinction receiving the most attention. If the military oath to protect the Nation and its people from threats both foreign and domestic has credence then the military ethic must transform itself from a killing machine to a sustainable greening machine. (Who would not want to serve?)

    There is precedence here as well.. One only need go back to the CCC days. Large unemployment. The Nation reeling from the economic disruption of the 20s. Lack of skilled work force in changing economies. Crumbling infrastructure. Concentration of wealth in the hands of the few. Need I go on?
    CCC addressed all that in one “green” effort. The same could address the transformation to the Green Awakening Economy. People can be employed learning and building needed skills. Vast green energy infrastructure could be built using the inexpensive labor of the unemployed. Health care and skill base of the population transformed to the Nation’s and World’s advantage.

    We can do that and again become a leader, but more importantly an allies in the “We All Win War” that the rest of the world. A task that the world clearly must address as well if humanity is to stand a chance in hell of long term survival. That must happen PDQ. The door step of doom awaits.

  7. “That means coal companies will go out of business, and then oil companies and gas companies will follow them.”

    Q: So that means invest in nuclear power plant suppliers. But when? Now? (No, not for individuals but maybe for pension funds? 10 years from now? Or much later?)

    When it comes to financial and economic decisions, timing is everything. I can’t count the numbers of entrepreneurs and investors who lost everything right down to the shirts on their backs betting on solar thermal, PVs, (and even on wind energy) back in the 1980s and 1990s.

    Also, some asset managers, I presume, will correctly identify which coal companies will be the ones who survive to supply the world’s power plants for the next 40 years. Those that do will have a stable base of income to build on, right? Which companies are most likely to come out on top of this melee?

    • Leif Knutsen

      It has been said that “Green Growth” is an oxymoron. I disagree. If “Growth” becomes defined as the opposite of planetary ecocide and not $$$? The opposite of destitute billions but clean water, nutritious food, justice and equality? The nurturing and rejuvenation of threatened species and habitat? The education and acceptance of women and girls as equal and deserving members of Humanity? The transformation of “socially enabled capitalism” and Governments that have evolved into “self licking ice cream cones,” (Dr. J. Hansen), into watchdogs for a peaceful, just, harmonious cohabitation of all members of Space Ship Earth as we hurtle space and time? The lifting of the burden of necessary labor powered by exploited fossil carbon and the whip and cries of man and beast to the passive advancement of intellect, arts and love powered by the daily allotment of sunshine?
      Sounds like “Growth” to me.

      • Russ Day

        Paul – your comments and observations are certainly based on the evidence at hand. I have noticed in our neighborhood that some new arrivals are putting solar panels on their roofs. I learned last month that the owner of the local garden supply/repair shop put solar on his business roof and told me that it was the best investment he’s even made. Regards, Russ

  8. From what I’ve read recently, many are beginning to argue that only a global, nuclear power building program can provide enough electricity to fill the gap left by the reduction in the use of coal, oil and gas. The US now has 600 coal plants many of which may be shut down in the next decade or two. China has recently set up a crash program to invent and build a thorium reactor by 2014. Several other countries are also trying to solve its many problems. If one or more are successful, I would expect the coal, oil and gas companies to want to get into the thorium reactor business, as investors if nothing else. In the meantime China as plans to build 86 conventional reactors to add to the 20 they currently have in operation. The US plans to add 10 to the 100 currently in operation. Many of the US plants are getting close to their 40-year operating permit but some will probably extended to 60 or 80 years. Russia plans to add 41 to their 23, India plans to add 28 to their 21 and there are 31 additional plants being planned in Japan, South Korea, UK, France and Canada. That’s a total of at least 196 nuclear plants now being planned in these 9 countries at the present time. The argument is that the risk posed by these plants is far less serious that the risks posed by the continued use of coal, oil and gas at current or much higher levels. Of course, the nuclear waste problem continues to be serious, but is often referred to only as being “manageable”. The other activity that deserves to be monitored is the development of Small Nuclear Reactors that offer the prospect of mass production and widely distributed (dispersed) power generation. NuScale is one of the companies to watch as their reactor is now nearing approval, if the current testing program at the Idaho National Lab is successful.

  9. Hi Paul. I love your work. When you say the market is working, I know you are talking on a specific industry level. But how can the market usher in sustainability when it uses a monetary system which compels us to grow the economy. Many “green” technologies are more efficient and less profitable than what they are replacing, meaning a reduction in macro-level GDP. This trend toward zero marginal cost will make capitalism obsolete as profits will be harder to come by in most industries affected by that phenomenon. Do you believe we need address the fundamentals of our infinite-growth economics system? How so?

    • paulgilding

      Chris. Strongly agree. As I argue in my book, we will unfortunately address climate change in isolation from confronting the real problem – the absurd idea of infinite growth. But then we will move on to that bigger question.

      • Joan Halgren

        Chris & Paul, it seems zero marginal cost will be okay since eventually we will all deal on Earth with the an almost ‘absolute’ need to share what’s left of natural resources that will be aided by new innovations. So all will be well eventually, and Paul’s notion of a “stable state” economy will prevail. Additionally, this new era is probably manifesting quicker than we realize and the ol’ Barons will vanish from their current perch as the 1 percent–history tells the tale. A good book( that supports how stodgy organizations are the last to realize their folly is “Wealth & Democracy” by Kevin Phillips. It reminds us all how the ‘Gilded Age’ can swiftly change focus with true creativity. Paul, I take heart at your continued endeavor to support positive change for humanity–don’t let go of your vision and it will happen:)

    • Leif Knutsen

      The cost of solar energy is coming down and the cost of black is going up. Two things come to mind. First is that “We the People” must prevent individuals and Corpro/People from profiting from the pollution of the commons. That obviously will raise the price of black a huge amount. GOOD! Hold on, there is more. Second we should price the cost of all social services, everything from street sweeper to universal health care, government, courts, jails, the military, interest and pay back of the National Debt into the price of all energy. Green energy BTUs become the universal currency. That will stabilize the combined money value of rich and poor alike and all military forays will be cash up front. Want war, pay for it with higher energy costs. More green production, lower cost of energy. Now you are talking $$$ for BTUs. On the other hand NO TAX! NO IRS!

      No war? the cost of energy comes down. Healthy society, the cost of energy comes down. Use lots of energy, you pay a bigger share of social services, us less, a smaller share. Burn 50g/h of fuel in your bimbo yacht, fine, you still pay a fair share of social services. As is, I pay for the environmental disruption of your pleasures. The final piece of the pie is to price the cost of all green distributed energy development into the cost of energy as well. NOW my solar becomes REAL value to my home, community, country and the world at large. I do not need to rely on tax subsidies to compete with under priced tax subsidized ecocidal fossil fuel, and if I do not have potential for green energy, at least ALL my taxes are payed and home efficiency will reward my budget big time. Every one needs energy. Every one needs health care, clean water, air, dirt, oceans and functioning life support systems. Make everyone pay for them. World wide… Flood the world with green energy you flood the world with equality, health, education and a lot less rat race… A solar panel in every third world life becomes a cash cow. Terrorism would be an aberration from the past.

  10. Many thanks for reason to hope. Rupert Murdoch has gone a long way toward destroying civil society here in the United States with his Fox News channel–constantly debunking climate science as well. Is there any way at all that you could take him back?

  11. Paul,
    Great article, as usual. Addressing climate change will produce winners and loosers on the economic front. My concern is that our current Australian leadership is insisting we, as a country, be a looser. Some of our technology is driving solar voltaics in China. Our leaders are divesting our country from expert advisers. They see salvation in green armies. They are about to remove all incentive for renewable energy technology development, and implementation. From a position of leadership in some areas, we continue to be further transformed into a “dig and ship” economy.

  12. Alison (South Australia)

    Thanks for another great article. I noticed you quoted that the EU utilities have dropped $750b in value. In the last article you quoted a $600b drop for EU utilities over the past 5 years. Have they truly dropped a further $150b in value in the past 3 months. If so 1) that is astounding, and 2) it shows just how quickly investors respond and businesses can collapse. Society scale changes due to the impacts of climate change are a ways off; but impacts due to mass shifts in the economy look to be much closer at hand.

    • paulgilding

      Alison. Actually that’s just a combination of currency movements and different sources with slightly different numbers. The best summary is on the Economist (behind a pay wall) but search for “How to lose half a trillion euros” and you’ll find it. But the point you make is correct – that’s how fast investors change when they decide to shift.

      • “But the point you make is correct – that’s how fast investors change when they decide to shift.”

        Absolutely! You are so right!

        So, who (which equities) and when (time/date) should investors shift their assets:

        A. To nuclear power suppliers?

        B. To publicly traded solar PV companies?

        C. To natural gas companies? (But as you say they are going out of business, too. So divest now? Or in 25 years? Or somewhere in between?).

        D. Here is my “toughest” question! (Just joking!): Should pension funds (and individuals) who hold Exxon (reputedly the best managed company in the oil and gas industry) bail out? They would have made 12.99% on their investment if they bought Exxon a year ago today (June 5, 2014). The best rate you can get from any bank in the USA is 1.10%, just for example.

      • Leif Knutsen

        I made 9.5% om my solar PV system each of the last 3 years and did not pollute the commons. Admittedly because of progressive WA production tax credit. However because of my early investments I have contributed to the continuing lowering of the instillation cost to others as well as employed local folks and manufacturing. Imagine those “pollution profit margins” after a level playing field is in acted.

      • paulgilding

        Of course William, I’m not qualified to give financial advice :) But the general question you raise is a key one for many people from various parts of society. My serious advice to investors/pension fund managers is simple.
        1) Take very seriously these trends, and understand them as top level investment questions (not CSR considerations).
        2) Don’t delude yourself that you’ll jump before everyone else when the “time is right” because that’s not how markets work and you won’t.
        3) Construct your portfolio for resilience i.e. make sure if the carbon crash happens and you miss it, that you have enough diversity in you portfolio to smile at the upside you made to balance the losses from Exxon!

        Personally, I couldn’t sleep at night if I held Exxon – I don’t care how big a return I make if the source of it has spent decades subverting climate science!

  13. I strongly recommend you and your readership get acquainted with a new book The Case for Space Solar Power by John C Mankins which shows the only significant barrier to SSP becoming the short and long term answer to the need for low-cost, resilient energy are the currently high satellite launch costs. However, China’s Northwestern Polytechnical University is working on a way to slash launch costs. It works on a principle similar to that used in the Cannae Drive propulsion system recently tested by NASA and Boeing.. Second generation versions of this technology are expected to convert one kilowatt of power into almost three tonnes of thrust. This game-changing propulsion technology – when used in association with reusable launch vehicles – would cut current launch costs to roughly one per cent of current levels!
    I have copies of correspondence between the Rt. Hon David Willetts Secretary of State for Universities and Science and the technology’s inventor, which shows this amazing technology is real. Its development was initially funded by two UK Government grants after the Government had appointed “highly qualified technical experts and academics [who] carried out an assessment” – “followed by independent tests and evaluation” (of an experimental thruster). Source – Margaret Hodge [holding answer 27 November 2006] in a written answer to a parliamentary question from MP Alan Duncan [Hansard Report dated Thursday 5 December 2006].

  14. John Collee

    Great piece Paul. the Time article was also well worth reading.
    Here in Australia, the “free-market” rhetoric of Murdoch and his pals is fast being exposed for what it really is – an attempt to protect the interests of the 1%. For all the swagger, Tony Abbot has a frightened look and his efforts to drum up international support against carbon taxation are already looking pretty ridiculous. the voters who supposedly gave him his mandate are melting away faster than the greenland ice-cap and solar panels are sprouting all over the suburbs, with or without government subsidy. When the real free market in energy starts flexing its muscles theres going to be, as you’ve long predicted, an ugly rush for the lifeboats.

  15. Felicity

    An informative, thoughtful article, Paul, but I feel that this whole process is being slowed down by the massive over-population of people on this planet. This is one of the main reasons driving the continuation of fossil fuel use. The more people we spew onto this planet the more people there will be needing energy, housing, farm land, transport, food, water, clothes, furniture, etc. No wonder that the earth and the natural world are under such dire pressure from this insatiable human horde. Yet this over-population problem rarely gets mentioned let alone studied in real depth. It seems to be a taboo subject.

    • Leif Knutsen

      While overpopulation is indeed a problem, nature has a cruel hand in talking care if that. However IMO that is not the main problem but the fact that one carbon stomper can easily equate to a thousand+ third world folks. Get up to the jet set and that could even be 100k. Therefor the attitude adjustment from carbon stomp to living lightly will still need to be paramount in the transit.

      The education and acceptance of women and girls as equal and deserving members of Humanity with voluntary access to birth control as well as universal health care, even if it is basic, will quickly lower the birth rate and the associated emanate carnage Nature has in store for all.

      • Len Puglisi

        ‘Overpopulation’: Giving it a comparative importance vis-a-vis other factors , eg. economic growth, inappropriate technologies, overconsumption, may be valuable for some reasons. I rather not see this comparison effort being given much attention. For me, all factors are significant and the various streams of action should be coalescing in their efforts against global warming factors.
        But, and it’s an important ‘but’, in looking at population growth, there’s an important distiction to be kept in mind – that is as between global dimensions and local, especially urban dimensions. There are serious repercussions predictable for urban areas if populations are allowed to grow – the near doubling of the Metro Melbourne area as predicted from near 4 mill to near 8 mill is a case in point: serious damage to food production areas, considerable loss of native vegetation and other-than-human species, not to dwell on congestion, pollution, loss of greenspace, loss on personal access to nature surrounds… It’s fanciful that all this can be avoided by ‘good planning’, setting targets, etc. There are good reasons for past failures, and the doubling of population will only make the situation considerably worse.

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