Tailwinds for clean energy and the Paris agreement, deepening doldrums for the incumbency

Among the utilities U-turning away from incumbency business models is RWE, and this month the German giant joined the list of peers acquiring renewables companies, buying one of Europe’s biggest downstream solar players, Belectric Solar and Battery. Those utilities endeavouring to defend the status quo and resist change are finding life increasingly difficult. In Hawaii, for example, solar advocates report increasing ease of grid disconnection in fighting utility pushback.

Investors continue to awaken to the smell of energy-transition coffee, albeit not fast enough. The evidence might be clearer to them, were they not so constrained by short-termism. A new index, the "Clean 200", contains giants on the frontiers of the energy transition. Its top 20 performers include Toyota (1st), Siemens (2nd), Vestas (7th), Dong (11th), and First Solar (19th). It has grown in value by 22% in the last 10 years. An index of fossil-fuel companies, the "Underground 200", has grown only 8% in that time.

Lansdowne Partners, one of the largest hedge funds in London, became one of the very few hedge funds and private equity funds to set up a dedicated fund for renewables. Many institutions will have to follow. Barclays calculates that £200bn+ will be needed for UK energy investment by 2030, and concludes that nearly all of it should go to clean disruptive technologies. Governments could do a lot to help here, and the UK’s clearly isn’t, as things stand.

Meanwhile, on the other side of the energy-investment coin, those quitting fossil fuels were joined by a £500 million UK fund, Liontrust Macro Equity Income fund. Stephen Bailey, co-manager, described his motivations graphically to the Telegraph, in a reference to the Saudi Arabia’s "Post Oil Era2 investment strategy: "Even the Saudis appear to know the fossil fuels game is up."

The big oil companies evidently disagree. They continue to "binge on debt", as the Wall Street Journal put it on 24th August, hoping against hope that the oil price will rise to just the right level for their business models – not too high, not too low. Their combined debt is now $184 billion, double their 2014 level. In 2015, they spent more than 100% of their profits on dividends. In the US shale belt, bottom feeding private equity has begun to move in on debt-distressed oil assets. Bankruptcies among oil and gas companies have risen to 90 and counting.

And still, as the Saudis and Russians pump full tilt, the oil price remains too low for most companies to do anything but keep haemorrhaging cash. Saudi oil production rose to a record level of 10.67 million barrels per day in July, a distressingly large amount of it being required to to satisfy air conditioning loads in power plants. This is surely a candidate for the most dysfunctional use of fossil fuels in the world today.

Meanwhile, investment in exploration has plummeted, unsurprisingly, since the oil price began its fall in mid 2014. And so to the inevitable: oil discoveries hit a 70 year low this month. Oil demand in 2016 so far has been 94.8 million barrels a day on average. That is 34.6 billion barrels per year. Oil discovered last year: 2.7 billion barrels.

The industry is not even replacing 1 in 10 of the barrels that the world burns.

How long can that go on for, even if demand is falling? Bloomberg was one of the few to warn of a supply shortfall ahead. At which point, the oil price would likely soar to levels that make oil essentially unaffordable for many – and hence renewables, storage and EVs even more attractive.

The oil industry loses on the low side and the high side both.

As for their hopes for gas from shale, the problem with leakage was in the news once again. In a study of a US methane hot spot in the American Southwest, researchers pinpointed the sources of 250 leaks using airborne sensors. 600,000 metric tons of gas was escaping in all: 6 times the loss from the Aliso Canyon disaster every year. The largest emissions measured in one flight were from a gas processing plant. More than half the emissions came from 10% of the leaks.

It looks increasingly certain that the gas industry has a systemic problem with leakage, right across its infrastructure value chain.

Another door shut for the industry as a result of public protest. Victoria became the first Australian state to permanently ban fracking and coal seam gas.

As for the UK’s government’s increasingly incomprehensible ambitions for shale, in the face of all this, officials told the press that all households near fracking sites are set to get money paid straight into bank accounts.

Bad as the distress was in the oil industry in August, the nuclear industry suffered worse. The dire economics of the Hinkley Point C plant, on which so many nuclear hopes hinge, has reached the point where even the conservative British news organ The Economist, long a champion of nuclear power, withdrew support. "Hinkley Pointless", raged its headline. "Britain should cancel its nuclear white elephant and spend the billions on making renewables work." The article majored on National Audit Office figures showing both solar and onshore wind cheaper than nuclear and gas. As for offshore wind, Bloomberg New Energy Finance calculated that it could replace Hinkley nuclear at the same cost today.

It became clear in August that there had been a substantial reversal in opinion on nuclear versus renewables among UK business leaders. A huge majority of the Institute of Directors’ members were for new nuclear 12 months ago. Now only 9% "strongly agree" with going ahead. 75% strongly support solar and wind.

EDF continues to behave as though it is trying to dig its own grave. It emerged that CEO & Chairman Jean-Bernard Levy knew about the new British Prime Minister’s decision in July to defer a decision on Hinkley Point, but did not tell his board at the meeting where they voted narrowly to go ahead. Five EDF board members then sued to block the decision, arguing that Levy’s withholding of information rendered any outcome of the board meeting invalid.

How will all this affect the Chinese involvement in Hinkley C? As things stand, they are contributing a third of the £18 bn capital cost of the plant. They have taken a dim view of the UK dithering. But little noticed during August, a mass protest in China against a Sino-French nuclear waste plant – in Lianyungang, Jiangsu province – caused an about-turn by Beijing that must be a threat to the Chinese nuclear industry’s plans. The government cancelled the plant. This is the third nuclear project in China to attract significant public opposition in the past 10 years, and all have been called off. It looks as though Beijing tends to listen to its people on issues like this.

Which is interesting, because an opinion poll in August showed that the Chinese public overwhelmingly back their government’s renewables push: 92% profess themselves willing to pay more for green power. Equivalent polls in US and UK recently showed 50% and 48% respectively.

Encouraging as much of this is, it becomes ever clearer that the pace of the transition must pick up. July 2016 was Earth’s hottest month in recorded history, Nasa reported in August: the 10th hottest month in a row. Speaking of the NOAA-led annual State of The Climate Report 2015, climatologist Michael Mann said: "The impacts of climate change are no longer subtle. They are playing out before us, in real time."

2015 was the warmest year ever. Total warming is now 1˚C since pre-industrial times. The oceans are now 70 mm above 1993 average, rising 3.3 mm every year. Arctic ice was at its lower ever maximum in February 2015. The Greenland ice sheet experienced melting over 50% of its surface.

Back to President’s Obama and Xi. Their ratification of the Paris Agreement means it is now probably set to become international law this year. 57 countries have now ratified or signalled intent so to do, entailing 57.88% of global emissions. The treaty comes into force after a minimum of 55 countries representing a minimum of 55% of emissions have ratified.

The rare dissidents are being encouraged back into the fold. After a meeting with John Kerry, the Philippine President is now likely to back the Paris Agreement.

A year on from his climate encyclical, Pope Francis reinforced his appeal to Christians to act. "It is up to citizens to insist that this (Paris Agreement in force) happen, and indeed to advocate for even more ambitious goals," he said.

Amen to that.