Fossil fuel civil war is good for renewables – and the planet

It’s taken a decade of supporting clean energy policies to help the renewable energy industry breach the barricades of the rich and powerful fossil fuel industry.

Now that it has happened – with new generation costs favouring wind and solar over coal and gas – the cause of the renewable energy industry is being assisted by a most unlikely development: the declaration of civil war within the fossil fuel industry.

As Big Oil, Big Gas and Big Coal come to grips with the rapid changes in costs, and the so-called revolution in electricity markets that appears to have taken them by surprise, the fossil fuel giants are at war with each other over their declining market share, and plunging market prices for their commodities. Maybe it is just the impact of competition. But it is not just good news for wind and solar and other emerging renewables. It is also great news for the planet.

Take the oil industry as an example, where the oil price has crashed as OPEC countries led by Saudi Arabia and other Gulf countries are trying to run the shale oil cowboys from the US out of town by keeping their supply taps on, even as prices fall.

The end result is that the higher-cost shale industry is closing down rapidly – more than one-third of rigs have been withdrawn from the market, and analysts are calling the end of a business model that many said was dubious from the start.

And the oil industry in general has deferred or cancelled an estimated $200 billion of spending in new projects, that would have cost more than twice the current market price. Exxon Mobil was the latest to announce a cut-back, slashing 15 per cent from its budget.

This is good news for the renewables industry, because delays and cancellations in the deployment of fossil fuel projects will lead global capital to find another outlet. And according to many leading investment banks, that leads inexorably to solar and other renewables, which can offer cheaper prices and guaranteed returns over the life of the assets – a financier’s paradise.

And it’s good news for the planet and the looming carbon budget. Saudi oil, for instance, is a lot cleaner – in terms of greenhouse gas emissions – than tar sands, shale, or what could be exploited from costly deepwater reserves or the Arctic.

The same is happening in the coal industry. Glencore, one of the biggest coal producers in the world, is putting a stop to some Australian production, and a hold on new developments, because of a fall in prices it blames on over-production from the likes of Rio Tinto.

It is a classic ruse deployed by large producers with lower costs – switch on the production taps to push the prices down, and watch your more expensive rivals suffer. BHP Billiton and Rio Tinto have been doing it in the iron ore industry, and now Rio Tinto is being accused of doing it again in coal.

Glencore boss Ivan Glasenberg says he won’t dig coal out of the ground “if we are not generating the returns.” His theory is that he can make more profit if it reduces production and pushes up the price. But it’s a big victory to the environmental movement; climate concerns were never likely to shut down fossil fuel projects, but bad economics will.

But the flip side of the supply equation is demand. China cut coal consumption by 2.9 per cent in 2014, leaving some to believe they may have already reached a peak in coal consumption, and reinforcing views that China could stop imports within a few years.

The sensational Chinese video hit Under the Dome, is being viewed as the next “An Inconvenient Truth”, but with more bite, and support from the government. The potential impact is so profound that Merrill Lynch warned that tighter pollution targets could trigger problems for many coal and oil producers, difficulties in the debt market and even a devaluation of the Chinese currency.

India is also unlikely to remain a huge coal importer. New research from Deutsche Bank shows how imported coal is being undercut by cheaper solar, which is now predicted to account for 25 per cent of that nation’s electricity supply by 2022. That is a phenomenal development.

In the electricity industry – the $2 trillion global monolith that sells electrons to customers – there is also profound change that amounts to civil war. The main battles are no longer being fought between fossil fuels and renewables – apart from in a few jurisdictions like Australia and some US states where the Conservatives play for Team Coal. The turf war has now moved between those utilities who are trying to embrace the future, and those that might be stuck in the past.

Consider what has happened in Europe, where the biggest utility E.ON, has chosen to dump its fossil fuel interests and focus on technologies that reflect the dramatic changes in the industry – localized generation, solar, wind, battery storage, micro grids and electric vehicles. RWE is following suit, albeit with a slightly different strategy.

In the US, the story is the same. David Crane, the CEO of NRG, the largest generation company in the country, has said that centralized fossil fuel generation is essentially dead, and the future lies in decentralised energy, and local generation, solar, wind; battery storage, micro grids and electric vehicles.

In Australia, the same preparations are being made. Origin Energy and AGL Energy are not quite ready to call the end to centralised generation, although Origin has hedged its bets – but both have made moves into the solar PPA market, where they will own the solar arrays on rooftops, and are also looking at battery storage, micro grids and electric vehicles.

They need to, because their biggest competition will not just come from the new entrants – be they solar specialists like SunEdison, SunPower or Sungevity; the smart technology geeks at Apple, Google and the myriad energy management system providers; or the battery storage developers or retailers with new business models, like PowerShop.

The real competition in the future will come from the utilities themselves. In a decentralised energy future, there will not be room for all the incumbent network operators, generators and retailers. Network operators such as SA Power Networks think they will survive and the centralized generators and the retailers will go the way of the telephone handset and the typewriter.

That sets the fascinating prospect that the future battles will be largely regulatory, essentially over who gets to embrace the technologies that will define the future, and deliver the products to market. It sure as hell won’t be fossil fuels. Even the incumbents know that.