It’s been fascinating to watch the reaction of the mining industry and others to revelations that Greenpeace is seeking funds to stop the uncontrolled expansion of the thermal coal industry in Queensland and NSW.
The hyperbole and the hypocrisy have been breathtaking. Greenpeace wants to shut down the entire mining industry, say the lobbyists, who spent $28 million on a campaign they thought was important to protect their economic interests, but who wish to decry environmentalists for wanting to spend a smaller amount to protect theirs.
It turns out that Greenpeace is not seeking to close every coal mine and put every coal miner out of work after all. As Bob Brown noted on ABC TV the other day, even greenies need cars, and houses, and other things made from metals and other stuff you dig up from the ground. The campaign, according to John Hepburn, the Greenpeace activist who is being vilified by the Treasurer, business groups and some media, is to focus on the “uncontrolled” expansion of thermal coal mines, which Greenpeace sees as the biggest threat to its economic interest, which is best described as a stable climate.
Let’s be clear: There is absolutely nothing wrong with the sort of expansion planned for the Australian thermal coal mines, and the multi-billion investments in coal ports and associated infrastructure along the Queensland coast and in NSW – just so long as you believe that climate change is not caused by humans, and/or the world won’t bother doing anything about it, and that fossil fuels can never be superceded by clean energy technologies.
However, if you believe that the real answers to those three issues are that it is, we will, and they can, then investing in this infrastructure is a risky business. This is the underlying theme of the Greenpeace campaign. In the absence of political and investor engagement, they propose to raise $6 million to help local communities wade through the tonnes of pages contained in environmental and economic impact statements, and to fund legal challenges.
The goal of the campaign is quite clear. To protect environmentally sensitive areas, to harry and delay projects and infrastructure which will result in the trebling of thermal coal exports from this country, and through this bring publicity and focus on the enormous risks in such investment, which are more than just environmental. But is it, as the Treasurer claims “irrational”, or is it a reasonable summation of the risks for investors, the government, and the general population.
Let’s forget about the environmentalists for the moment and see what some serious economists say about this. Again, the International Energy Agency’s 2011 World Energy Outlook is not a bad place to start. It said that if the world wants an even chance of having a stable climate, by limiting global warming to around 2°C, and total emissions to 450 parts per million, then it had better act fast, because its carbon budget was running out quickly.
In the “450 scenario” painted by the IEA economists, the construction of new coal-fired power stations is effectively brought to a halt by 2017, and the global share of coal-fired power generation plunges from 41 per cent to 15 per cent by 2035, with more than 600GW of coal-fired plants shut down. China, once the biggest customer of Australian thermal coal, ceases to become an importer of any coal. India becomes its biggest customer.
But then there is the technology factor. In the last three months, the governments of India, China and the US have all predicted that the cost of utility-scale solar will fall below that of either coal-fired or gas-fired generation by the end of the decade. In India, because of its reliance on costly imports and poor infrastructure, it could come as early as 2016.
That will not signal an instant cessation of their coal plant expansion, but it will give them fuel for thought, so to speak, and will certainly slow the rate of growth. As the executive director of Tata Power told Bloomberg in an interview just yesterday, coal projects are becoming impossible to build, and the company will favour wind and solar over coal. “Why would anyone want to invest at this stage in a coal project?” he asked. This from the largest private power producer in what is supposed to be Australia’s biggest market.
Australian investors, and the government that is supporting the infrastructure, on the basis that Indian and China coal demand will not slow down, might want to ask themselves the same question. In the US, according to this Reuters article, developers of 250MW of utility-scale solar contracted to deliver it at under 10.9c/Kwh from 2013 –the same price as the estimated cost of new coal-fired power. In China last week, bids for a 30MW utility-scale solar plant were pitched at 77c a watt – nearly enough to make it as cheap as new-build coal in that country.
Even if coal miners are not asking themselves these questions, it is true that global investors are also becoming increasingly focused on the “carbon budget” and what this might mean for long-term risks and returns. In the UK, for instance, the Carbon Tracker Initiative wrote to the Bank of England, expressing its concern about the level of risk faced by UK investors on the London Stock Exchange to companies with high carbon exposure, mostly from coal investments in the UK.
The response from BoE Governor Mervyn King was equivocal, but analysts have been doing some exploratory work as to what a carbon constrained might look like from the point of view of company valuations. In late 2010, two analysts from Citi, Elaine Prior and Craig Sainsbury, painted two “what if” scenarios based on a stringent 2°C scenario.
In one of their examples, they divided the “time” components of Coal and Allied and its “base case” valuation of $113 a share. More than a quarter of that valuation was based on post 2025 production. In its “extreme” case, where the world is taking dramatic action on climate change, its valuation of Coal and Allied fell 44 per cent to $50.35 a share. (Coal and Allied has since been bought out by its major shareholder, Rio Tinto).
In the case of Woodside, which had a base case valuation at the time of $44.64 a share, the net present value falls by one third to $29.46. “Those who believe that stringent carbon constraints are probable, in line with the ’2 degree’ scenario, may wish to underweight fossil fuels in their portfolios (or to issue mandates to their fund managers to take this stance),” the analysts wrote at the time.
But it’s hardly top of mind for most investors. As Nathan Fabian, the CEO of the Investor Group on Climate Change notes, there is an awareness that market dynamics will shift at some point, but most expect that to be well after 2020. The outcomes from Durban reinforced the view that it will be the back half of 2020-30 before any regulation begins to bite the coal industry. “At this stage, there is an assumption that most coal exposures can be traded out of well in advance of crunch events.” he says. The question of how to diversify away from carbon risks may be on the minds of some super funds, but this is yet to flow through to the investments of fund managers who are investing on one- to three-year horizon.
The Greenpeace campaign aims to accelerate that awakening. And there is plenty to suggest that its campaign could be effective. Look, for instance, at the grass-roots campaign against coal seam gas; or even that against wind farms, in Australia and in other Anglo-Saxon countries. Look, also, at the success of the Sierra Club’s Beyond Coal campaign in the US, which last week celebrated the announced closure of the 100th coal-fired power plant since early 2010. That’s one a week for the last two years. Over the last decade, the campaign claims to have prevented 166 proposed new coal-fired power plants from being built.
Greenpeace is particularly appalled by the prospects for the Galilee Basin, a region hitherto unexploited by the coal industry. There are plans to export 385 million tonnes from this region alone – more than Australia’s current coal exports. Massive infrastructure needs to be built, including a 500km railway and new port facilities, and the size of the mines will treble from 20 million tonnes a year to 60 million. “We think this is completely out of control, given everything we know about climate change, and we need a plan to gradually phase out the thermal coal industry, rather than ramping it up,” Hepburn says. “None of this is being scrutinised. No-one is doing due diligence.”
It also has other impacts. A study by The Australia Institute has highlighted how the $8 billion First China coal mine, which plans to extract 40 million tonnes of thermal coal from the Galilee Basin, has admitted that the broader economic consequences of its activities could include driving more than $1.2 billion worth of manufacturing offshore, cause 3,000 job losses and result in higher housing costs and a less equal distribution of income.
One thing that the reaction to the Greenpeace campaign has highlighted is that Australian politicians, and the mainstream media, is ill-prepared for such a debate – the level of political rhetoric is such that these things cannot be discussed intelligently; the depth of financial analysis, non-existent. When policy is constructed, it is done in such a way that it inspires AGL Energy, the nation’s biggest investor in renewable energy over the last five years, to buy the country’s biggest carbon emitter, the Loy Yang A brown coal power stations. Even if it has no long-term future, it will likely make so much cash in the short term, it doesn’t matter.
Some brown-coal generators and their adjacent mines will close, but they will be paid up to $2 billion by the taxpayer for the privilege under the government’s buyout scheme. This appears to be a uniquely Australian invention – none of the 100-plus coal-fired plants closed in the US, or the 90GW of coal-fired energy closed in China, received a dollar. Presumably, the mining barons are counting on the government bailing them out when their infrastructure and mining investment becomes redundant too, after they’ve made off with their short-term profits. It would be a fair bet they would have their hands out for a lot more than $6 million. Who, exactly, Mr Swan, is being irrational?