Measuring Climate Risk from the Bottom-Up Fossil companies that remain fossil are unattractive for investors Henrik Jeppesen, CFA, CAIA Head of Investor Outreach North America Carbon Tracker Initiative – June 13, 2018 Hjeppesen@carbontracker.org
Challenging Business as Usual www.carbontracker.org @carbonbubble #strandedassets 2
The Carbon Bubble => We can’t burn it all We compared ‘allowable’ carbon emissions in a carbon budget to 2050 with 80% probability of staying below 2 ˚C threshold with existing fossil fuel reserves. CO 2 embedded in 1,400 Carbon total reserves and emissions resources owned 1,200 (Gt) by private & public companies 1,000 2860 GtCO 2 800 600 400 200 900 GtCO 2 - 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Business as usual (NPS) Carbon budget Total 2˚C Carbon Budget Carbon Bubble Stranded Assets for the fossil fuel industry Source: Unburnable Carbon report, Carbon Tracker, 2011 3
Climate financial risks • the physical risks that arise from the increased frequency and severity of climate- and weather-related events that damage property and disrupt trade; • the liability risks stemming from parties who have suffered loss from the effects of climate change seeking compensation from those they hold responsible; and Companies are overstating energy demand, underestimating an increasing role for renewables and ignoring looming changes in • the transition risks that can arise through a sudden and energy. disorderly adjustment to a low carbon economy. Source: Speeches by Mark Carney, Governor of the Bank of England 4
Energy is being disrupted by tech and learning Normalised cost framework $/unit 25 Policymakers can tax the fossil 20 Subsidy needed externality for renewables 15 10 5 0 2010 2012 2014 2016 2018 2020 2022 2024 Renewable Fossil Source: Carbon Tracker • Solar costs have been falling at 17% p.a. since 2010 and IRENA calculates the learning rate at 35%. In an ever wider range of locations, solar and wind are cheaper than fossil fuels. • Battery costs have been falling at 20% p.a. since 2010 and by 2020 EV will be price comparable with oil cars. • When renewables beat fossils, policymakers can move from subsidy to taxation. • Cell phones … Emerging markets will adopt renewable based energy systems. 5
The energy consensus is wrong Annual growth rates of solar and wind …Yet 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Actual 2017 DNV Shell Mountains BP Statoil Reform IEA New Policies OPEC EIA Global Exxon energy Source: Shell, BP, DNV, OPEC, Exxon, IEA, EIA. To end of modeling horizon Companies are overstating energy demand, underestimating an • The energy consensus is shaped by incumbents, expects business as increasing role for renewables and ignoring looming changes in usual, and makes four main errors. energy. • Costs … They expect renewable costs to stop falling rapidly. • Growth … So they expect a rapid slow-down in the growth of renewables. • Timing … So they do not expect peak fossils for another 30 years or so. • Significance … And they think that peaking demand is not important. 6
Lower expected demand creates stranded assets Illustration only – not drawn to scale Relatively expensive assets. Uncompetitive at lower demand and prices. Price: $ per barrel Supply Stranded Assets P 1 Wasted Capex Original P 2 Demand Reduced Demand Volume P 1 = Original price Relatively inexpensive P 2 = Reduced price assets. Still competitive at lower demand and prices. Source: Chevron, Managing climate change risks, a perspective for investors , 2017 7
Cost curves assume economic logic 8
2 Degrees of Separation Oil & Gas upstream scenario analysis powered by Rystad’s Ucube with PRI US$ 2.3 Trillion (~1/3) potential capex to 2025 is unneeded vs. Business as Usual. ① 2/3 of potential unneeded capex controlled by publicly traded companies. ② Source: 2-Degree of Separation, Carbon Tracker, Jun 2017 www.2degreeseparation.com 9
Lower oil demand will reduce refinery margins Typically more expensive plants can refine a larger range of higher margin products. => Under 2°C scenario oil demand could fall 23% by 2035. => Industry margin decline $3.50/bbl causing industry EBITDA to drop ~50% by 2035. Falling oil demand and Bullet point falling profit margins Margin Call: Refining capacity in a 2 ᵒ w orld Source: Carbon Tracker Initiative, Margin Call , 2017 – margin data from Wood Mackenzie 10
Power Generation: relative profitability all-in costs Relative profitability for Coal vs. new CCGT/ old CCGT. 54% of EU coal currently runs at a loss Profit adjusted for Variable O&M Fixed O&M anticipated climate costs (pollution tech control). 97% of EU Coal will be loss-making by 2030 EU: 2024 / US: 2021 EU: 2027 / US: 2023 New wind will be cheaper New solar PV will be cheaper than existing coal than existing coal Source: Carbon Tracker Initiative, Lignite of the Living Dead , 2017 11
Regulated markets have positive stranded values Stranded value for US coal Stranded value EU coal power power owners owners 10,000 1,000 Stranded value ($m) 0 8,000 Stranded value (€m) -1,000 6,000 -2,000 4,000 -3,000 2,000 -4,000 -5,000 0 Southern Duke AEP PPL WEC DTE Dominion Xcel Berkshire H. AES Westar Ameren FirstEnergy CMS OGE NiSource Dynegy Great Plains NRG Vistra -6,000 RWE Uniper EPH CEZ EnBW STEAG Vattenfall Engie EDF PPC PGE Tauron ENEA Enel CE Oltenia SA Regulated % Merchant % Since most coal generation in the EU is 2/3 of US coal capacity is regulated, loss-making, utilities could save money by making it highly profitable and thus could retiring coal power in accordance with the lose billions if the US complied with the Paris Agreement Paris Agreement Source: Lignite of the Living Dead, Carbon Tracker (2017) Source: No Country for Coal Gen, Carbon Tracker (2017) 12
We have seen some early victims Electricity sector write-downs in Europe $bn 40 35 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 Source: IEA • European electricity. $150 bn of write-downs and a fall in sector capitalisation of over $500bn. • Global coal . Bankruptcy of sector leaders with near peak coal prices. • Machinery. Collapse in demand for turbines, and in the GE share price. • Automotive. The global auto sector has been forced to do a U turn towards EV over the last 18 months. 13
The energy transition and demand peaks Victims of the peak Global fossil fuel demand total 2022 Global fossil fuel 2021 demand for electricity Global oil 2020s 2021 Global demand for new oil cars VW demand 2014 Global coal demand Peabody 2011 Global gas turbine demand GE Global gas 2007 2030s European fossil fuel demand for electricity RWE demand 2005 EU gas demand Gazprom 14
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