BHP swallows Lomborg line and sells itself short on wind and solar

Australia’s biggest company and the world’s bigger miner, BHP Billiton, has issued a downbeat forecast for wind and solar in a blog post that predicts demand for fossil fuels – among its core businesses – will continue to flourish for decades to come.

The BHP blog post is tantalisingly titled – “How much spark is there in the solar and wind revolution” – and begins with the comment that the world is seeing “the dawn of a wind and solar power revolution”.

But a “dawn” is about all it sees.

The post is apparently based on the ground-breaking Paris climate agreement, which aims to limit average global warming to well below 2°C and possibly at 1.5°C.

Yet its forecasts for wind and solar are based on the world completely ignoring that deal and pushing forward with the current suite of enacted and proposed policies, rather than the additional initiatives that the agreement will require world governments to bring to the table.

Borrowing a line often spoken by climate contrarian Bjorn Lomborg – and frequently cited by the Coalition government – BHP says that wind accounts for just 3.5 per cent of total electricity and solar 1 per cent and will not play a huge role into the future.

It says that the share of wind and solar will grow, even triple, but that fossil fuels will continue to provide 80 per cent of the world’s energy needs in 25 years time.

This forecast is based on the International Energy Agency’s “new policies” scenario, which forms the bedrock of similarly pessimistic predictions by Lomborg, and also forms the basis of the Australian Coalition government’s latest energy white paper.

It effectively ignores climate change because the new policies scenario is expected to produce an outcome of between 3°C and 4°C of global warming. Is this then the basis of BHP Billiton long-term investment decisions?

Billions of dollars are at stake, and investors would not want to see a repeat of its Johnny-come-lately dive into the US shale gas industry which cost it billions of dollars in write-offs.

BHP, however, hints that the trillions of dollars of sunk investment in fossil fuel industries will make it difficult for renewable energy to get much more of a foothold.

“The trillions of dollars already ‘sunk’ in existing conventional, long-life power plants must also be considered,” it writes. “This will impact the speed of renewables uptake, but not the direction of change.”

It then adds that there is plenty of headroom for renewables to grow before the “constraints of the current renewables technology begin to bite.”

It defends its predictions by citing the cost of solar in the world’s biggest energy market, China, where it predicts that solar will not compete with coal for at least another decade.

These are perilous predictions. The established world order has made a terrible hash of predicting the uptake of wind and solar, or realising its rapid cost reduction curves.

BHP recognises that solar is already cheaper than fossil fuels countries such as Morocco and Chile – but suggests it will take a while for that to happen in China.

But solar has an extraordinary capacity to surprise. In March, the head of Trina Solar suggested that the cost of solar could fall to 0.50 yuan by 2020.

By September, it was already there, with a bid for 0.52 yuan ($US77/MWh) in a tender in Mongolia, and with predictions of further price falls in solar modules because of ongoing efficiency gains and a surplus of capacity.

Indeed, in a research note issued on Tuesday, Deutsche Bank said China was likely to cut its feed in tariff for solar to around 0.55 yuan to 0.75 yuan, depending on the region and its solar resources. At this level, Deutsche says, solar will be at grid parity.

“Given the sharp decline in system costs (they have fallen by 30 per cent in the last year) this announcement … is not surprising,” Deutsche says. And even with these lower tariffs, developers in some provinces will be able to generate internal rates of return of about 10 per cent.

Meanwhile, prices in key markets such as the UAE hit a low of $24/MWh.

BHP may be basing its China forecasts on the regulated price of coal and solar. But its interests are probably more entwined with the comparison between solar PV and imported coal. And solar already wins out handsomely on that score.

And while BHP is holding on to the idea that fossil fuels will account for four-fifths of energy supply in decades hence, others have completely different views.

Liu Zhenha, the head of China’s State Grid, the world’s biggest utility, says that by 2050 wind and solar could account for 80 per cent of the world’s total energy needs. He has an ambitious plan of a global network to deliver those resources.

Even the IEA, in the scenarios where they consider what might happen should the world act on the Paris climate treaty they have just ratified and brought into effect, suggests that wind and solar will overtake coal and gas as the single biggest source of electricity by 2040.

But it should be noted the IEA’s “ambitious” forecast is based on incredibly conservative forecasts for the cost of solar.

The document that suggests solar will be the biggest single source of energy by 2040 predicts the costs of utility-scale PV to fall from around $US160/MWh now, to $US42/MWH in 2050.

This in incredibly conservative, because in 2016, those 2050 forecasts have been well and truly beaten in Abu Dhabi ($US24/MWh), Chile ($US29/MWh), the US ($US30-40/MWh) and India is already down to $US65/MWh.

Let’s hope that BHP, in its subsequent blogs that will look at those climate policy options, brings a dose of reality to its forecasts. But like other fossil fuel giants – such as BP, Shell and Exxon – it has an interest in playing down those forecasts, if only to influence the vast capital flows that keep their business turning.