Renewable Market Tested by Corona/Oil Crash

March 11, 2020

Bloomberg:

Oil’s fall to some $35 a barrel from $55 just last week has major implications for addressing climate change. Low prices incentivize more use of oil; it squeezes the budgets of oil companies, putting clean-energy projects in doubt; and some governments feel pressured to prop up struggling oil companies. All that drives up emissions, which is bad news for global warming.

However, if low prices are sustained this time, there might be big positives for fighting climate change.

Renewable energy is a more mature industry than five years ago. As it becomes a less risky investment, it has attracted big investors who are showering a lot of cash and building some projects that rival the capacity of conventional power plants. At the same time, oil exploration is becoming less viable economically, with an increased risk that even those projects that go ahead no longer yield good returns and with worries about stranded assets growing.

“Now it doesn’t make sense to reduce your investment in renewables if the oil price crashes,” said Mark Lewis, head of sustainability at BNP Paribas Asset Management. “It’s more logical to reduce your investment in oil.”

That reality points to a broader change in investor sentiment since Paris that affects companies and governments alike. A number of large investors have come together under groups such as Climate Action 100+ to demand companies put sustainability at the heart of their business models, and that isn’t likely to change.

Tesla has effectively become a proxy for how the green economy is viewed by investors. Musk has demonstrated that a mass-market electric car is viable, prompting all the major carmakers to follow his lead. He’s building his latest plant outside Berlin, in a show of his intention to take the fight to the heart of Europe’s leading luxury car producer. Tesla is after all the world’s second-most valuable carmaker by market value after Toyota Motor Corp.  

For governments worldwide, pressure for policy measures has mounted as the issue increasingly resonates, in part due to the kind of direct action and media campaigning espoused by Greta Thunberg

Low oil prices offer one reason to heed that voter call, since it’s a good time to end fossil-fuel subsidies or to raise taxes on consumption of fossil fuels. Such a move can also help avoid the sorts of destabilizing anti-government protests seen in FranceIran and Ecuador when energy-price increases were proposed.

It could even be done in a way that “protects or even benefits poorer households and communities,” said Helen Mountford, vice president of climate and economics at the World Resources Institute. The goal of reaching out to “left-behind” communities is a dynamic driving policy from the post-Brexit U.K. to South Africa and swaths of Latin America that suffered waves of unrest late last year.

During the last down cycle, between 2014 and 2016, when oil briefly dipped below $30 per barrel, India cut annual fossil-fuel subsidies from $29 billion to $8 billion and even raised taxes on consumption. Some of the money raised was diverted to renewable-energy subsidies, after setting an ambitious goal to deploy as much as 175 GW of mainly solar and wind power by 2022—about twice the power generation capacity of the U.K.

“Many countries are pursuing electrification and decarbonization to make them less dependent on the volatility of oil markets,” said Adnan Amin, former director general of the International Renewable Energy Agency. “This kind of event will only reinforce that momentum.”

New York Times:

On Monday, oil prices saw their biggest one-day drop since 1991, driven down by coronavirus fears and a price war between Russia and Saudi Arabia. If we’re entering an era of really cheap oil, it’s worth asking what that could mean for climate change.

The traditional view is that a plunge in oil prices hurts efforts to cut greenhouse gas emissions, as people use more oil and disregard alternatives like electric cars. Fatih Birol, the head of the International Energy Agency, has warned that cheap oil may slow the transition to cleaner energy worldwide.

But there are also reasons to think the old rules may not apply this time, and that the climate impact of cheap oil doesn’t have to be so stark.

Cheap oil, for instance, has often depressed sales of electric cars. But nowadays, a large share of electric vehicle sales is being driven by regulations in places like China, Europe and California. Those aren’t going away. What’s more, battery prices have been quickly falling over time, which means that electric cars are steadily becoming more competitive with conventional cars, even if you ignore fuel costs.

“For most consumers, high upfront prices are the biggest thing holding electric vehicles back,” Colin McKerracher, head of advanced transport at Bloomberg New Energy Finance, said in an email. “Battery prices matter more than oil prices. If those keep falling, electric vehicle adoption will keep going up.”

He added: “Automakers are unlikely to change their long-term plans as a result of fluctuations in the oil market. Electrification is here to stay.”

Generally, a drop in oil prices also leads to an increase in travel, as people take advantage of low prices at the pump or cheaper airfares. But that’s less likely to happen this time, since worries about the coronavirus outbreak are keeping many people at home.

One big question, said Amy Myers Jaffe, an oil expert at the Council on Foreign Relations, is whether the coronavirus outbreak could permanently alter people’s work and transportation habits as companies get more comfortable with remote work and videoconferencing, reducing oil demand over time. “It will be interesting to see if we see big structural changes once this crisis subsides,” she said.

Another dynamic to watch: The oil crash, which is putting a financial strain on drilling companies, could cause some companies to reconsider their plans to invest in low-carbon technology. Alternatively, some companies may decide that renewable sources like wind and solar are actually a safer investment in a world of unstable oil prices.

But the biggest wild card is how policymakers react to the economic slowdown that’s being driven by coronavirus fears. If countries like China try to revitalize their economy by subsidizing polluting industries like steel and cement, emissions could soar in the coming months. During a period of economic crisis, climate concerns often fade, many analysts have noted.

But there’s another scenario: Governments could seize this moment to enact new climate policies. Low oil prices are often a good opportunity to remove subsidies for fossil fuels, which have been increasing in recent years, or raise taxes on carbon dioxide emissions, since consumers are less likely to feel the impact.

“Policymakers may try to bail out the conventional energy system and continue on as usual,” said Michael Webber, chief science and technology officer at Engie, a French energy company. “Or they could try to scale back subsidies for fossil fuels, help retrain workers into cleaner sectors, and take the moment to try to address the climate problem.”

In other words, it’s really up to us.

Reuters:

The oil price crash has led to Danish offshore wind developer Ørsted overtaking Norwegian oil major Equinor as the most valuable energy company in the Nordics, highlighting the appeal to investors of renewables over fossil fuels.

Shares in Equinor slid nearly 18% on Monday as crude prices plunged 25% after top producers Saudi Arabia and Russia began a price war that threatens to swamp global oil markets with supply.

At around 09:00 GMT on Tuesday, Equinor’s market value stood at $42 billion, while Ørsted was valued at $45 billion, according to share information on the companies’ websites, the first time Ørsted has overtaken the Norwegian company.

The drop in oil prices on Monday was the biggest one-day percentage drop since Jan. 17, 1991 at the outset of the first Gulf War, and for investors highlighted the risk of investing in oil companies. As well as volatile crude prices, oil producers have also been hit by a global shift away from heavily polluting fossil fuels.

Ørsted, formerly named DONG Energy, has seen its shares gain more than 40% over the past year, while shares in Equinor have fallen by around the same margin. Ørsted has been rebranding itself as a ‘renewable major’ after it sold its oil and gas business in 2017, courting investors interested in green investments which have seen a boost thanks to policies to protect the environment.

“All investors look at Ørsted and say: Here we buy into the future and when they look at the oil companies, including Equinor, they buy into the past,” said head of equity research at Sydbank Jacob Pedersen.

5 Responses to “Renewable Market Tested by Corona/Oil Crash”

  1. J4Zonian Says:

    We can’t let fluctuating fossil fuel prices and the industry’s collapse interfere with the transition to a sustainable society. Government direction with mandates, rationing, high taxes with rebates for those who need them, and all manner of laws must be used to keep the pace of change safe. Nationalizing fossil fuel, ICEV, agro-chemical, banking and other industries will be crucial; I hope we soon have a strongly progressive democratic government with the courage to do it. Outlawing the manufacture or purchase of ICEVs, gas heaters, new gas connections, gasoline machines of all kinds*, etc. preventing ICEV access to city centers, interstates, state roads, etc. should all be instituted asap, with time for people to switch to public transit (which has to be free or nearly so) and where absolutely necessary, to EVs.

    * Imagine the joy of urban weekdays and suburban weekends without gas cars, trucks, mowers, and other ear beaters, accompanied by a resurgence of birds and insects.

    • rhymeswithgoalie Says:

      Nationalizing fossil fuel, ICEV, agro-chemical, banking and other industries will be crucial….

      Even if all of today’s progressives got into office, they wouldn’t nationalize much beyond health care. The rest would be the appropriate application of taxes, tax credits and regulations.

      • J4Zonian Says:

        It’s far too late for incrementalism, and the market religion is and always will drive us in the wrong direction. I don’t talk much about political reality except to say that there’s nothing real about it. Human society doesn’t follow linear progression. So I’m neither optimistic nor pessimistic about what we’ll do. I just know what we have to do, and understand that things change rapidly and constantly in politics while ecological realities abide.

        • rhymeswithgoalie Says:

          Don’t underestimate how quickly taxes can shut down a business practice. Investors notice it immediately and stop funding it, weak players drop out almost immediately, and big players hold emergency meetings. (The multinationals will just shift their focus to practices outside of the enforcement jurisdiction in any case.)

          The advantage that a government full of progressives would have is that they’re not beholden to donors and lobbyists to weaken their actions.

  2. rhymeswithgoalie Says:

    I’m chary of the possibility that some of these mega solar farms might displace community food crops, but it’s good if they replace marginally-cropped land, or farmland that has lost its water supply.


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