The global energy system is rather like an oil supertanker, sailing the oceans with its vast cargo. Everything is fine as long as the giant ship doesn’t have to alter course or stop suddenly.
The system, overwhelmingly reliant on fossil fuels, is highly complex but over time has been remarkably resilient, delivering considerable economic growth and political and societal stability in many regions.
The trouble, according to a new report, is that climate change and other factors mean the good ship energy is having to change course – but most investors in the sector are either asleep or looking the other way.
The report, compiled by Meteos, a UK-based not-for-profit think tank and strategy company, is the result of an ongoing dialogue between a number of heavy hitters in the investment community along with advisors from the fossil fuel industries and representatives from academia.
“The fact that energy contributes so much both to economic activity and political stability often leads analysts to conclude that the main characteristics of today’s fossil fuel-reliant system are immutable”, says the report.
Many of those contributing to this study do not agree. “The pace of change (in the sector) has been astonishing”, says the study. If investors and the industry itself don’t take notice of what’s going on, then they’ll end up shipwrecked.
Shale oil and gas have brought about an energy revolution in the US, with a dramatic drop in overall energy prices: all this is having a big impact on the finances of the energy companies. Meanwhile in Europe energy utilities are being hit by falling fossil fuel energy demand, particularly in Germany where renewables are taking an ever greater share of the market.
Beware stranded assets
The report says China might exploit its shale gas reserves, the world’s biggest. There’s also a push in the country towards cleaner energy and a decline in the take-up of some fossil fuels, particularly of coal.
“Efficiency improvements, slowing economic growth and aggressive pollution abatement measures are combining with competition from alternatives (particularly hydro and nuclear), leading some analysts to predict an absolute decline in Chinese coal consumption by 2016”, says the report.
And, overhanging the whole energy sector, is the question of climate change.
The study says the market continues to underestimate the potential for climate-related change to the energy system.
“…At some point the disruptive economic impacts of climate change will come to outweigh the benefits of business as usual, and that will eventually lead to a concerted effort to constrain how much carbon is put into the atmosphere.”
Energy investors, says the study, should be more concerned about so called “stranded assets” – fossil fuel reserves listed as corporate assets which will have to stay in the ground if any meaningful action is to be taken on global warming. They also need to keep pace with climate- and energy-related policy and regulatory changes in various countries.
Investors should also take note of significant changes in public opinion on climate-related issues, such as the concerns raised about smog in China which led to environmental issues being highlighted in the country’s 2011-15 Five Year Plan.
The other factor having a big impact on the global energy system is the move towards greater energy efficiency in many countries.
Thinking local
“Across the Organisation for Economic Co-operation and Development countries (OECD) energy consumption has fallen while the economy has grown; for instance, in 2012 energy consumption fell 1.2% while the economy grew 1.4%.”
In Europe there is a big push for more energy efficiency, driven by both climate change and price factors. China has developed targets to reduce the energy intensity of its economy. Even the US, the world’s most profligate energy user, aims to double energy productivity by 2030.
The big energy companies are also threatened by a move towards localised, micro-generation power projects in many areas which could spark a phenomenon described as the “utility death spiral”.
“…As more customers leave, fewer utility customers are left to finance an expensive infrastructure. This in turn drives up utility prices, leading to more customers leaving the utility, and so on.”
Some groups say investors in the fossil fuel industry should divest quickly so as to avoid a fall in corporate share prices when the carbon bubble finally bursts.
Those involved in the Meteos report take a more measured approach, saying investors need to be far more proactive and to take a systematic approach to analysis of the energy system.
The considerable risks of investing in the sector need to be understood. Perhaps most important of all, fossil fuel companies need to be more transparent and willing to disclose their strategies for the future, including how they plan to tackle the risks to their operations posed by climate change.
