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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.

climate marketValue 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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  • Peter

    When Tony Abbott cried ‘Whyalla will be wiped off the map’ regarding the introduction of the carbon tax, although it was a slight exaggeration actually that was the point I thought.
    The goal of legislation to address climate change is to accelerate the transition from fossil fuels to renewables. Whyalla won’t necessarily be ‘wiped off the map’ but the town will have to adjust. It will be an ‘economic loser’ unless it can adapt to the new economic reality – not likely I believe. It will probably shrink in size, but of course Whyalla ‘a loser’ will be offset by all the economic winners spread thinly around the country – which is arguably more equitable. That’s of course just a repeat of economic history.

    • MrMauricio

      Whyalla should move fast-perhaps follow Port Augusta in the race for the new energy technologies like salt storage solar
      A decent government would be racing to assist and make sure these old technology backwaters will be given achance to adapt and survive and not abandon them to the current rapidly changing energy markets and an inevitable demise.Other places like the Latrobe Valley,Newcastle and Bunbury/Kwinana come to mind

      • johnnewton

        A decent government? Where do you get one of those?

        • wideEyedPupil

          You sell the Greens to your local population I suppose… but do we really have time for them to replace the ALP as the major party of the left and remain the only significant party of the environment? (Apologise to Planet Party)

          • johnnewton

            With the majority of people supporting our treatment of asylum seekers, I can’t see it happening quickly enough. But i guess my question should have ended with …anywhere?

          • Matthew Dawes

            You seem to be trapped into the idea that a democracy only has two parties and the labor party is of the left, also the idea that the labor party pro environment.

          • John Silvester

            Left and Right labels of the two major parties may serve some historical relevance, but not necessarily predictive of how either major party will respond on any given issue.

            A clear example is carbon mitigation. The supposedly left leaning party brings in a market mechanism to reduce carbon emissions. And the following supposedly Right leaning party wants to dismantle the market mechanism and replace it with a taxpayer funded subsidiary.

            In the case of renewable energy it’s not Left – Right it’s big money politics.

          • wideEyedPupil

            That doesn’t negate what I was talking about concerning the rise of the Greens on the left of Australian politics (mostly they are towards the left on issues, despite the sometimes irrelevance of that traditional spectrum of political positions). The fact is that ALP moved massively towards neo-liberal economics under Hawke-Keating rule. It’s left a vacuum in their party, Gillard was once of the left and by the time she was PM was no where near it. The Greens are much more impervious to big money politics than the ALP and even the unions who often march in lockstep with the bosses on environmental issues (and sometimes do not like the Green Bans of the 70s/80s)

          • wideEyedPupil

            I’m not trapped in my thinking in the way you describe at all. I’m well aware of comments by the corrupt Martin Ferguson that ‘Labor or Liberal, Australian energy and mining policy is always consistent’. He despises renewables just as much as the current minister (his love of the currently irrelevant wave energy notwithstanding)

      • Leon

        As a friend who worked for the Productivity Commission once said of the Liberals, “they don’t like to pick winners”. The implication being that they are more likely to leave it to the market to decide. In this case though, they seem keen to support a likely loser (in the form of coal).

  • http://www.beyond2030.com/ Beyond2030

    Great article, although as usual I wish I were able to share more in Paul’s unbeatable optimism. My question is whether the market forces will be allowed to run their course because unfortunately the designated losers of this “war” are still in the driving seat when it comes to political funding / lobbying power.

    • wideEyedPupil

      Yeah if the market is doing it’s job, then it is not working nearly fast enough or well enough. And if, as Paul says, that incumbents are rarely responsive to major disruptive dynamics in time for them to survive a transition, then how about populations, civilisations and ecosystems? The prognosis is actually acutely poor and few (except for climate scientists in private) have the courage to see that with open eyes and communicate it.

      Of course we must maintain hope, and faith in human resourcefulness and wisdom in the face of disaster, but the momentum of the climate is unforgiving and hard to play catch-up with.

      • sean

        this is true, but like most disruptions will happen on a bell curve, with most of the transition happening in a very short period of time. At first it will only be new build that will find it economically attractive to choose the new option, then the costs in maintaining business as usual will become so great that the bulk of businesses will switch method.

        at the moment we are seeing prediction of the inflection of that bell curve. Check back in 4 years to see how close to the money we were.

        • wideEyedPupil

          The bell curve you are talking about is four centuries wide (emissions are two centuries old) we actually don’t have anything like that amount of time to see the other side of the bell curve roll out.

          So it’s not a bell curve at all, it won’t be as disruptions never happen like that. That rising curve of the past needs to go of a cliff in the near future! Potsdam gives heavy historical emitters like Australia ten years from 2010 to zero our emissions. From their we must sequester carbon somehow.

          • wideEyedPupil

            Or this if the Disqus accepts the image for once.

        • wideEyedPupil

          This!

  • Murphy

    Not a good time to be holding fossil shares ‘eh?

    Having so such fears, I fund it fun watching the solar/wind powered lecky meter spinning backwards most any time of day or night. Plan now is to add one more windy to generate hydrogen to serve backup generator, car, boat, name you toy.

    A plus no fossil industry can supply is in the power to keep the lights on for neighbours when the fossil powered grid inevitably goes awry. There’s a lot of aged and disabled where we live. Happy neighbours does rock.

    Yes, with no more power bills, there is a perpetual smile in our home that wasn’t there before. How do you put a price on that content feeling that no fossil can compete with.

    The mind it does boggle in the neatest ways.

  • Chris Fraser

    Great article thanks !