March 5, 2020 Read More →

IEEFA update: Renewable energy could leave USD20 trillion of fossil fuel assets stranded within 30 years

Financial institutions need to factor in impending risk

The vast disruptive power of technology in the energy markets, particularly renewable energy plus batteries, will leave up to USD20 trillion of conventional energy assets stranded uselessly in its wake within 30 years unless investors embrace the clean energy transition.

I’d rather financial markets learn it today, and not in 10 – 15 years

Citing Mark Carney, Governor of the Bank of England, Tim Buckley, Director of Energy Finance Studies with the Institute for Energy Economics and Financial Analysis (IEEFA) warns that investors and financiers need to be aware of this impending financial risk, and how much the 30-year transformation is going to cost them.

“I’d rather financial markets learn that today, and not in 10 – 15 years,” says Buckley.

“If we don’t deal with the cost of a disorderly transition today, the cost is going to be a whole lot harder and larger than if it’s an orderly planned transition.

TWENTY TRILLION IS TOO BIG. IT COULD DESTROY THE GLOBAL FINANCIAL SYSTEM. It can be almost entirely avoided with planning and transitioning and can start now by putting an explicit price on the key externality – carbon emissions.”

Buckley notes solar, wind, electric vehicles and lithium-ion batteries are a group of new technologies collectively disrupting global energy and transport markets.

“They do more damage to the competitor than they create value for their shareholders,” he said in a podcast interview with the 3i Investment Innovation Institute in February 2020.

“We are grappling with that right now in Australia.

“When solar generation is full-on in the middle of the day in South Australia, prices of electricity go negative, and it destroys the value of the incumbent industry, regardless of whether it makes an effective return to the solar investor once built. It doesn’t make a return to its shareholders unless they have a 25-year power purchase agreement and are therefore not exposed to the spot market.

We’ve seen 10 coal plant closures in the last 10 years in Australia

“The Chinese are doing it, America’s power sector is embracing this opportunity, and that’s how Australia is going to do it. The risk gets transferred from the solar and wind project to the consumer or to industry, so that is a form of subsidy, a risk that needs to be addressed – in Australia it is effectively already being addressed, in moving to extremely variable five minute interval pricing of electricity markets.

“Well before you make a viable return on your solar project you destroy the viability of an inflexible, outdated 24/7 baseload coal plant, because for 8-10 hours of the day a baseload coal-fired power plant is unviable, despite being the highest marginal cost of production supplier.

SOLAR IS ZERO MARGINAL COST SO IT WILL DESTROY THE VIABILITY OF THE COAL-FIRED PLANT and that’s why we’ve seen 10 coal plant closures in the last 10 years in Australia. New coal plant builds are not economically viable nor bankable. Solar is a really disruptive force. So that’s the negative, that’s the risk.”

The nature of solar is so disruptive it will drive us towards the solution

Buckley says the opportunity is also there.

“The scope to go to extremely high positive and negative wholesale prices for electricity can be “gold” to someone who owns a battery, or pumped hydro storage, or who owns a gas peaker (generators that supply electricity only at periods of very high demand) because the price of wholesale electricity becomes more variable,” says Buckley.

“It will be negative 1000 dollars more frequently, but it will then also go positive $14,000 at night when the sun’s not shining, or the wind’s not blowing,” says Buckley.

SO THAT PROVIDES THE FINANCIAL INCENTIVE FOR A MASSIVE – TENS OF BILLIONS OF DOLLARS – OF NEW INVESTMENT in pumped hydro storage, solar thermal, grid connectivity, lithium-ion batteries and demand response management.”

Buckley says the nature of solar is so disruptive it will drive us towards the solution.

“Renewables are increasingly low cost but also intermittent, so they are disruptive,” says Buckley.

“Reliability is key, but the answer is clearly not more 24/7 baseload power. That’s last decade’s solution to this decade’s problem.”

Buckley notes Mark Carney came out in September 2019 and said utilities that fail to transition will die.

They are a transformer. They will survive the transition to the new industry

“There is no question on that,” says Buckley.

“The Peabodys (Peabody Energy Inc.) of this world will die. They are not transitioning; they are not embracing the future; they’re trying to hold it back, but their product is obsolete and no longer competitive. It’s the most technologically challenged and it’s going to disappear on a 30-year view. Not tomorrow, next decade in the OCED, and on a 30-year view globally.

“The CEO of NextEra Energy, the world’s biggest and most profitable utility, says it will happen by 2030 years in the U.S. It’s not me saying this, it’s James Robo, the CEO of the most successful utility. It is also the CEO of Macquarie Group saying it and investing US$20bn in the next five years.

THIS WILL HAPPEN FASTER THAN PEOPLE THINK.

“For example, AGL is the biggest polluter in Australia, mea culpa. But it is also embracing the technology disruption and using its thermal power generation cash flow to invest in wind, solar, virtual batteries, demand response management, virtual power grids and those sorts of things.

“So, they are a transformer. They will survive the transition to the new industry, but the laggards will not.”

Listen to this podcast with Tim Buckley recorded by the Investment Innovation Institute in February 2020.

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Battery storage, renewables, hydrogen and rare earths – investment and transition planning can create jobs now and into the future

PacifiCorp’s transition to renewables and battery storage sets a new industry pace

New Pakistan renewables policy represents a step change in clean energy ambition

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India’s stranded asset risk in thermal power sector underestimated

Global capital acknowledges stranded asset risks

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