New energy, climate change and stranded assets

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1 City University of Hong Kong New energy, climate change and stranded assets Cameron Hepburn Professor of Environmental Economics Smith School and INET at Oxford Martin School University of Oxford and New College Professorial Research Fellow, LSE Hong Kong, 17 September

2 Agenda 1. Energy scarcity or abundance? 2. Disruptions 3. Divestment and stranded assets 4. Potential economic and geopolitical scenarios 5. Summary 2

3 Energy is critical for powering our industry 3

4 and our cities and towns 4

5 and is therefore of great strategic importance to the intelligence communities 5

6 and ensuring access to energy is of military significance oil 6

7 All of this importance might make you think energy was scarce but it is actually everywhere Source: 7

8 At conservative efficiencies, a small red square could power the entire UK s electricity, heat and transport A yellow area would supply a billion people in MENA at current EU energy consumption levels. Source: MacKay (2009) Sustainable Energy Without the Hot Air 8

9 I d put my money on the sun and solar energy. What a source of power! I hope we don t have to wait until oil and coal run out before we tackle that. THOMAS EDISON (1931) 9

10 Fossil Resources Temperature Increase relative to ( C) We also have more coal, oil and gas in known, economically extractible reserves than we can burn 2 o C 3 o C 4 o C 5 o C 6 o C high-end 2 o C 3 o C 4 o C 5 o C best guess 2 o C 3 o C 4 o C low-end Oil Reserves Oil Resources Natural Gas Resources Coal & Lignite Reserves Coal & Lignite Resources Natural Gas Reserves Fossil fuel CO 2 reserves and resources (Trillion tco 2 ) Source: Hepburn et al (2014) Resilient and inclusive prosperity within planetary boundaries China & World Economy 10

11 Fossil Resources Temperature Increase relative to ( C) We also have more coal, oil and gas in known, economically extractible reserves than we can burn high-end best guess 2 o C 3 o C 4 o C low-end Peak atmosphere not peak oil Oil Gas Coal & Lignite Resources ~ Fossil fuel CO 2 reserves and resources (Trillion tco 2 ) Source: Hepburn et al (2014) Resilient and inclusive prosperity within planetary boundaries China & World Economy 11

limitless energy Source: http://hight3ch.

12 If nuclear fusion were ever (?) to get going we would effectively have limitless energy Source: 12

13 So why has access to something so abundant held back human civilisation and now threatens it? Energy is super-abundant, but for millennia we had no idea Energy has been economically very expensive to get into useful forms for human economic activity But technological breakthroughs now look likely We are probably on the cusp of one of the most significant energy system transitions in human history 13

14 Agenda 1. Energy scarcity or abundance? 2. Disruptions 3. Divestment and stranded assets 4. Potential economic and geopolitical scenarios 5. Summary 14

15 Historically, energy transitions have happened slowly, each one taking many decades Source: IAEA 15

16 This has been used to suggest that there is a law that constrains how quickly new technologies can enter Source: Kramer and Haigh (2009, Nature) No quick switch to low-carbon energy 16

17 But this transition could be faster due to energy demand from billions of new middle class consumers GDP per capita ( 000 USD) 2050 Now capita Source: OECD (2012): OECD Environmental Outlook to

18 Agenda 1. Energy scarcity or abundance? 2. Disruptions Markets: fracking, solar, IT Government: climate change and renewables 3. Divestment and stranded assets 4. Potential economic and geopolitical consequences 5. Summary 18

19 Fracking: Impacts of shale tech appeared rapidly in US gas prices (but unanticipated by forecasters) 19

20 Shale then made the USA into the largest oil producer (at least for the moment) barrels per day Saudi Arabia United States Russia China Canada Iran United Arab Emirates Iraq Mexico Kuwait Source: US EIA International Energy Statistics 20

21 triggering the oil price crash US$/bbl real Oil prices fell from a peak of $115/bbl in June 2014 to below $50/bbl in January 2015 (driven by three factors): Supply: Increase in US oil output from 8.3 mbpd in 2006 to 12.3 in 2013; Demand: Lower oil demand from weaker-than-expected economic activity in several regions and stronger energy efficiency Geopolitics: Reduction of oligopoly rents 1 Oil Brent Crude 0 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 Jan % 48 1 OPEC announced that it would maintain current production levels (Nov. 27 th, 2015) Source: Aurora Energy Research; Thomson Reuters; EIA; IMF; OPEC 21

22 and hammering US coal players (with the White House putting the boot in) Source SNL Energy 22

23 The prospects for growth in coal globally now also look fairly flat. Source IEA (2014) World Energy Outlook 23

24 Key questions Will the shale boom run out of steam? Distinguish three phases: 1. Shale extraction in the US (with indirect effects on other markets) 2. Shale gas exports (through LNG terminals approved by FERC) 3. Shale gas technology diffusion to other countries 24

25 Solar PV: Over the long run, the solar PV module price collapse is remarkable compared to coal Source: Farmer and Lafond (2015) 25

26 And these price declines are based on standard, Silicon-based technology, rather than newer ideas 26

27 The prize in solar is now obvious, and innovations in solar are coming thick and fast Source: Rob Lavinsky, irocks.com Credit: Oxford Martin School 27

28 Much of this is based around new materials science to make better practical use of solar physics Perovskites (CaTiO 3 ) High conductivity Increasing efficiency Simple processing Graphene (C) o High conductivity o Very thin and flexible o 200x stronger than steel o Nearly transparent Graphene 28

29 Information technology: Disruption happening from new customer relationships enter Google Home automation ($3b) Data centre energy efficiency Renewable energy (> $1b) Autonomous vehicles Source: Thanks to New Climate Economy team 29

30 Players like M-KOPA threaten to cut coal s lunch in India (the next logical market as China slows) Source: 30

31 Agenda 1. Energy scarcity or abundance? 2. Disruptions Markets: fracking, solar, IT Government: climate change and renewables 3. Divestment and stranded assets 4. Potential economic and geopolitical consequences 5. Summary 31

32 CO 2 Concentration New science over the last 5 years clarifies the need for net zero emissions for any stable temperature Idealised emissions profiles falling abruptly to zero at different times Even in idealised emissions scenarios in which emissions of CO 2 are completely stopped tomorrow, temperatures will remain flat and not fall for hundreds of years (years) Source: Knutti & Rogelj (2015) 32

Keeping warming below 2 o C requires cumulative carbon emissions under 1,000 GtC before net zero We need to reach global net-zero emissions before we have emitted cumulative carbon emissions (CCE) of

33 Keeping warming below 2 o C requires cumulative carbon emissions under 1,000 GtC before net zero We need to reach global net-zero emissions before we have emitted cumulative carbon emissions (CCE) of about 1,000 GtC to have >50% chance of keeping peak warming below 2 o C Business-as-usual (BAU) assuming no mitigation action ~1,150 GtC 2 C peak warming mitigation with net-zero by 2100 ~1,150 GtC mitigation from business-as-usual and global net-zero emissions are required before 2100 Source: INET Oxford team analysis 33

34 The IEA s guess over half new global power plant to 2040 will be renewables might be conservative Source: IEA (2014) World Energy Outlook 34

35 Higher renewable penetration is already creating existential threats for conventional thermal plant Renewables deployment across Europe increases regulatory costs passed on to consumers while depressing the wholesale price and decreasing the profits of traditional generators Retail price, /MWh 35 Germany 30 Ireland Italy Spain 15 Denmark Portugal Wholesale electricity price, /MWh 20 United Kingdom 15 Spain Ireland Italy 10 Portugal Austria Solar and wind penetration 1, % 5 0 Iceland Norway Renewables penetration 1, % 1. Most renewable generation in Europe is produced by old hydro plant, most of which has been fully financed and as such this cost is not passed on to consumers. Subsidies for new renewables deployment in the form of solar and wind capacity is mostly financed through levies and increases retail price. Source: Aurora Energy Research, Eurostat 35

The German Energiewende provides an indication of the

Corporate restructure 9 8 7 6 5 4 3 2 1 0-1 -2-3 Q1

36 The German Energiewende provides an indication of the potential challenges coming at utilities Profit margin, % 3.3 billion: impairment charge on fossil plants in 2013 Corporate restructure Q European electricity utilities German electricity utilities Q Source: Aurora Energy Research 36

37 Consumers going offgrid with renewables creates the familiar self-reinforcing feedback loop Source: Aurora Energy Research 37

38 Agenda 1. Energy scarcity or abundance? 2. Disruptions 3. Divestment and stranded assets 4. Potential economic and geopolitical consequences 5. Summary 38

39 A fossil divestment movement has grown quickly in response to peak atmosphere Source: Guardian newspaper, 39

40 But will it actually do anything? I suspect it is not much more than a good investment strategy A good investment strategy? Free option on high carbon prices Performance of selected MSCI indices [Sept. 28, 2010 Sept ] Socially unproductive? Divestment is complicit in the problem; instead use ownership to force positive changes in industry Carbon intensity Source: Briand et al. (2015, MSCI) Beyond Divestment: Using low-carbon indices 40

41 At Oxford we are working with fossil fuel owners to develop principles for safe use of the product Source: Millar et al (2015) A safe future for fossil fuel investments, mimeo, Oxford University. 41

42 Agenda 1. Energy scarcity or abundance? 2. Disruptions 3. Divestment and stranded assets 4. Potential economic and geopolitical scenarios 5. Summary 42

43 The distribution of fossil reserves has always had big implications for political and economic power Rank Coal Oil Gas 1 US Saudi Arabia Russia 2 Russia Canada Iran 3 China Venezuela Qatar 4 Australia Iran Turkmenistan 5 India Iraq Saudi Arabia 6 Ukraine Kuwait US 7 Kazakhstan UAE UAE 8 South Africa Russia Venezuela 9 Poland Libya Nigeria 10 Brazil Kazakhstan Algeria Total of top % 82.9% 76.8% * 200 largest coal and oil & gas companies listed on stock exchanges around the world Source: CTI (2014) - Unburnable Carbon: Are the world financial markets carrying a carbon bubble 43

gas Mexico energy market reforms + private sector EXPORTS Oil

44 The USA is now in a position of energy abundance, reshaping power balance globally Canada oil sands & minerals US oil & gas Mexico energy market reforms + private sector EXPORTS Oil Gas Coal Refined products BRAZIL ethanol & oil Argentina shale gas 44

45 This is already raising political questions so imagine what happens when solar really gets going Will China fill the gap? SOURCE: EIA; Brookings Institution 45

46 A clean, cheap, and unlimited supply of energy is no longer implausible within several decades Source: Jaguar Plant in the United Kingdom 46

47 The beneficiaries might not necessarily be the usual suspects and energy powers Source: IEA (2014) World Energy Outlook 47

48 But not fast enough for the climate; once impacts hit, panic responses are likely, increasing risks of conflict 48

49 Agenda 1. Energy scarcity or abundance? 2. Disruptions 3. Divestment and stranded assets 4. Potential economic and geopolitical scenarios 5. Summary 49

50 Concluding remarks 1. Energy is not a scarce resource on Earth; it is extremely abundant. 2. Humans are just starting to work out how to harness it cheaply 3. Technological progress in energy is finally starting to accelerate 4. We have ample fossil fuels, but very little atmosphere left 5. Government responses to climate change (too little, too late) will lead to fundamental changes in the energy sector 6. Signs of the bumpy ride ahead can be seen in the impacts on US coal, EU gas, OECD utilities, divestment campaigns, frugal innovation in Africa 50

51 Thank you 51

52 Pumped hydro is so dominant because of its combined power & discharge times (log scale) For more details, see: electricitystorage.org 52

World Energy Outlook Dr. Fatih Birol IEA Chief Economist 24 November 2010

World Energy Outlook Dr. Fatih Birol IEA Chief Economist 24 November 2010 World Energy Outlook 2010 Dr. Fatih Birol IEA Chief Economist 24 November 2010 The context: a time of unprecedented uncertainty The worst of the global economic crisis appears to be over but is the recovery