A summary of our latest Energy Sector quarterly note, as finnCap’s Energy Sector Research Team looks in-depth at how the COVID-19 crisis has accelerated development in the energy transition, heeding that there is still much to be done.
Many think that COVID-19 will accelerate the energy transition, either through changing behaviour, shifting demand patterns/demand destruction or investor pressure. Arguably, it is already happening.
Falling renewable energy costs alongside more aggressive government green policies and lower long-term commodity price expectations are starting to expose the risk of stranded assets for oil and gas companies, i.e. hydrocarbon discoveries that will never be developed either for economic or climatic reasons. European integrated oil companies (IOCs) have already announced a collective US$37.5-US$49bn of asset write-downs this year, equivalent to 15- 20% of their current market cap.
However, to meet the goals of the Paris climate agreement and limit the average temperature rise to well below 2°C, it’s safe to say we can expect a whole lot more.
A way to go yet
Globally, coal’s market share remains stubbornly high, still accounting for 36% of 2019 power generation, with wind and solar representing just 8%. To reach the renewables penetration required to meet the Paris goals, sustained heavy investment will be required for the next 30 years.
More is needed. Global energy investment has shifted heavily towards renewables over the last decade. The UK is at the forefront of this transition and this year achieved the milestone of three months without the use of coal in electricity generation.
Carbon prices are too low. To get there, carbon will have to come with a cost, either directly or indirectly. The EU Emissions Trading System has been up and running since 2005 and similar schemes are growing globally. Carbon pricing initiatives now cover 16% of global GHG emissions across 45 jurisdictions. However, estimates for the required carbon price to achieve the Paris climate goals is way above the current US$30/tonne; as high as US$230/tonne according to some forecasts. Still, with renewables now cost competitive in the majority of countries around the world, there should not be much of a financial disincentive.
Governments are going green
Governments are also starting to recognise the importance of the energy transition, not only from a climatic perspective but also politically. At the end of 2019, the EU announced a new Green Deal, while US presidential hopeful Joe Biden has recently proposed a US$2tn accelerated investment plan into infrastructure and the clean energy economy. Clean, limitless in supply, increasingly competitive on costs, future-proofed, socially desirable and governmentally encouraged, renewables are here to stay.
Adapt or die?
Danish wind developer Ørsted has led the way and been rewarded, radically transitioning its portfolio away from dirty coal and oil towards wind. European IOCs are also moving in the right direction under duress from investors. While it is the larger-cap oil companies that are mostly under the microscope, SMID cap E&Ps serious about long-term growth and that want strong institutional backing are going to have to demonstrate their sustainability credentials.
This is already starting to happen, but if there is any doubt about the desire for and benefit of the energy transition, just look at the performance of UK clean energy/tech stocks, which are up over 150% on average this year.
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