As a follow up to our story on Monday, Fossil Fuels put on notice, the party is about to end, we thought we’d provide this excerpt from a recent blog from Michael Liebreich, the founder and chief executive of Bloomberg New Energy Finance.
Liebreich is emerging as one of the most insightful commentators on the rapid changes in the global electricity industry. “I’m not a huge enviro,” he says on the BNEF website. “I just spotted that the world’s energy system was on the cusp of a revolution that will deliver all sorts of benefits – energy security, jobs, equity, energy access in the developing world, cool technology, a healthier geopolitical balance and so on – in addition to climate and other environmental plusses.”
The whole article is worth a read, particularly as in Australia, the message does not seem to be getting through – not to the incumbent utilities or the policy makers, who seem destined to inherit the levels at the election next year; nor to many of those who control the fate of our investments.
“A mine-mouth coal plant is only – and forever – that. Its options are limited. But an electric utility or a fuels distribution company is fundamentally a provider of energy and related services, and not just a coal generator or a gas burner. Optionality allows a company to embrace new opportunities first at the margin, but eventually at the heart of operations. Most century-old firms know this already, as do all technology companies.
Today, IBM is a services company; Apple a consumer devices and services company. Asking the counterfactual “what would they be if they still made only mainframes or iMacs?” gives a simple answer: they would be out of business. Energy is a service to meet a need. As technical and societal needs change, so must the service, and that means portfolio options.
Some utilities hold fast to decades-old strategies and asset portfolios, but many of their bankers already think in terms of option pricing when analyzing new power generation. Investment banks are already pricing in risks for one-way fossil fuel bets that drive up the cost of new-build coal plants in Australia, as our recent research has highlighted – and try finding a major investment bank comfortable financing a new coal plant in the US.
For institutional investors, the question is much the same: “Are you comfortable allocating funds in a one-way bet without hedging against technology, policy, regulation, economics, or environment?” For long-term assets that may be exposed to unquantifiable risks, traditional models of analysis run out of oxygen. As Harvard Business School professor Martin Weitzman states in a recent paper, the assumption that risk-adjusted discount rates “decline over time towards the risk-free rate is very much dependent on the assumption that the project is not risk-exposed.”
The gathering momentum of the movement to force divestment from fossil fuel companies is an example of this change in discourse. In a 1990 referendum, 52% of Harvard students voted to divest from South African firms, with a 38% turn-out. Last year in a first-of-a-kind referendum, 72% of Harvard students voted to divest its $30bn endowment from fossil fuels with a 55% turn-out. In response, the Harvard Corporation stated that it “is not considering divesting from companies related to fossil fuels,” as most institutional investors would say on first instance. Are you prepared to bet that this generation of students will fail? What is your plan B?
The full article can be found here.
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