Measuring Climate Risk from the Bottom-Up Fossil companies that - - PowerPoint PPT Presentation

Henrik Jeppesen, CFA, CAIA Head of Investor Outreach North America Carbon Tracker Initiative – June 13, 2018 Hjeppesen@carbontracker.org

Measuring Climate Risk from the Bottom-Up Fossil companies that remain fossil are unattractive for investors

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Challenging Business as Usual

www.carbontracker.org @carbonbubble #strandedassets

=> We can’t burn it all The Carbon Bubble

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Total 2˚C Carbon Budget for the fossil fuel industry CO2 embedded in total reserves and resources owned by private & public companies

900 GtCO2 2860 GtCO2

Source: Unburnable Carbon report, Carbon Tracker, 2011

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.

Carbon Bubble Stranded Assets

• 200

400 600 800 1,000 1,200 1,400 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Carbon emissions (Gt)

Business as usual (NPS) Carbon budget

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Climate financial risks

Companies are overstating energy demand, underestimating an increasing role for renewables and ignoring looming changes in energy.

• 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

• the transition risks that can arise through a sudden and

disorderly adjustment to a low carbon economy.

Source: Speeches by Mark Carney, Governor of the Bank of England

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Energy is being disrupted by tech and learning

Source: Carbon Tracker

Normalised cost framework $/unit

5 10 15 20 25 2010 2012 2014 2016 2018 2020 2022 2024 Renewable Fossil

Subsidy needed for renewables Policymakers can tax the fossil externality

• 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.

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The energy consensus is wrong

…Yet Companies are overstating energy demand, underestimating an increasing role for renewables and ignoring looming changes in energy.

• The energy consensus is shaped by incumbents, expects business as

usual, and makes four main errors.

• 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.

Source: Shell, BP, DNV, OPEC, Exxon, IEA, EIA. To end of modeling horizon

Annual growth rates of solar and wind

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Actual 2017 DNV Shell Mountains BP Statoil Reform IEA New Policies OPEC EIA Global energy Exxon

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Source: Chevron, Managing climate change risks, a perspective for investors, 2017

Lower expected demand

Stranded Assets Wasted Capex

Price: $ per barrel Volume Supply Original Demand Reduced Demand P1 P2 P1 = Original price Illustration only – not drawn to scale

Relatively inexpensive

• assets. Still competitive at

lower demand and prices. Relatively expensive assets. Uncompetitive at lower demand and prices.

P2 = Reduced price

creates stranded assets

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Cost curves assume economic logic

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Oil & Gas upstream scenario analysis powered by Rystad’s Ucube with PRI

Source: 2-Degree of Separation, Carbon Tracker, Jun 2017 www.2degreeseparation.com

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US$ 2.3 Trillion (~1/3) potential capex to 2025 is unneeded vs. Business as Usual.

②

2/3 of potential unneeded capex controlled by publicly traded companies.

2 Degrees of Separation

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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.

Lower oil demand will reduce refinery margins

Source: Carbon Tracker Initiative, Margin Call, 2017 – margin data from Wood Mackenzie

 Bullet point

Margin Call:

Refining capacity in a 2ᵒ w orld

Falling oil demand and falling profit margins

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Power Generation: relative profitability all-in costs

Relative profitability for Coal vs. new CCGT/

• ld CCGT.

Profit adjusted for

 Variable O&M  Fixed O&M  anticipated climate

costs (pollution tech control).

54% of EU coal

currently runs at a loss

97% of EU Coal will be loss-making by 2030

Source: Carbon Tracker Initiative, Lignite of the Living Dead, 2017

EU: 2024 / US: 2021

New wind will be cheaper than existing coal

EU: 2027 / US: 2023

New solar PV will be cheaper than existing coal

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Regulated markets have positive stranded values

 2/3 of US coal capacity is regulated, making it highly profitable and thus could lose billions if the US complied with the Paris Agreement

Source: No Country for Coal Gen, Carbon Tracker (2017)

2,000 4,000 6,000 8,000 10,000 Southern Duke AEP PPL WEC DTE Dominion Xcel Berkshire H. AES Westar Ameren FirstEnergy CMS OGE NiSource Dynegy Great Plains NRG Vistra Stranded value ($m)

Stranded value for US coal power owners

Regulated % Merchant %

• 6,000
• 5,000
• 4,000
• 3,000
• 2,000
• 1,000

1,000 RWE Uniper EPH CEZ EnBW STEAG Vattenfall Engie EDF PPC PGE Tauron ENEA Enel CE Oltenia SA Stranded value (€m)

Stranded value EU coal power

• wners

 Since most coal generation in the EU is loss-making, utilities could save money by retiring coal power in accordance with the Paris Agreement

Source: Lignite of the Living Dead, Carbon Tracker (2017)

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We have seen some early victims

Electricity sector write-downs in Europe $bn

Source: IEA

5 10 15 20 25 30 35 40 2010 2011 2012 2013 2014 2015 2016

• 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.

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The energy transition and demand peaks

2005 2007 2011 2014 2021 2030s 2021

EU gas demand European fossil fuel demand for electricity Global gas turbine demand Global coal demand Global demand for new oil cars Global fossil fuel demand for electricity

2022

Global fossil fuel demand total

2020s

Global oil demand Global gas demand

RWE Peabody GE Victims of the peak VW Gazprom