The Fiscal Case for Fossil Fuel Divestment

Original article by Larry Coble and Joe Antoun, CFP and published by 350 Chicago

Executive Summary

Human civilization is swiftly proceeding toward the culmination point of a long-developing and holistic revolution in the energy sector for power generation, transportation and storage technology. With renewable energy sources, such as Solar PV and Wind generation gaining market share and experiencing dramatic price drops and projected to become the cheapest form of power generation by 2020₂, the installation and operation of alternative energy technologies will continue displacing 20^th century carbon emitting energy generation facilities and transportation systems utilizing oil, coal and natural gas. According to a Morgan Stanley report of July 6^th, 2017,

“Numerous key markets recently reached an inflection point where renewables have become the cheapest form of new power generation,” the bank said in a note.

“A dynamic we see spreading to nearly every country we cover by 2020. The price of solar panels has fallen 50% in less than two years (2016-17).”

Renewable energy sources, like solar and wind, are quickly becoming as cheap—even cheaper—than their carbon-intensive counterparts like coal.₃

Rapid buildout and utilization of renewable technologies will create seismic shifts and disruptions in markets for energy and transportation, leaving incumbent technologies and fossil fuel assets experiencing diminished utilization, followed by becoming stranded and written off on balance sheets as losses. With the author’s having researched the topic from a multiplicity of sources from the business press, think tanks, investment houses, government agencies and academia, this paper reports the latest findings on the financial and technological viability of the following renewable energy technologies:

• Solar PV
• On-Shore Wind Generation
• Battery Storage
• Electric Vehicles (EV’s), including Automated versions

While the paper explores the current and future status of the above technologies, the document studies the future of fossil fuels and related infrastructure and the financial stakes of maintaining investments in oil, coal and gas.

While the transition from a fossil fuels to renewables is occurring, the shifts will not necessarily follow a slow trend path. The evolution of the marketplace may occur rapidly with sudden leaps, causing swift adaptation of newer technologies and displacement of older, fossil fuel based equipment and economics, much like smart phones rapidly displaced flip phones and land lines.₄ Over the next 3 – 10 years, the energy technology revolution will begin displacing, sometimes swiftly, coal, oil and lastly gas as the prominent fuels for economic activity, allowing for renewables and storage technology to increasingly dominate the economic investment landscape for energy generation and transportation.

Key Findings:

• Coal has lost 90% of its Market Capitalization and will not recover due to economic forces favoring renewable technologies. Increased world-wide regulations will further exacerbate the decline in coal utilization but will not prove the decisive factor in the future.₅ Costliness of coal versus wind and solar will drive the fossil fuel from the marketplace as well as the infrastructural age of most coal burning power plants.₆
• Oil will hit peak demand between 2020 and 2023 with an estimated 2 million barrels per day(mbd) being removed from the market and the potential of 25 – 30 mbd by 2030, causing a slump in prices and driving costly oil fields from production, thus leading to diminishment in oil company valuations, especially corporations heavily invested in expensive Tar Sands and Shale extraction._{7/ 8}
• Electric Vehicles (EV’s) and Autonomous Electric Vehicles (A EV’s) are poised to increase market share globally due to improvements in battery technology, scalability, lower manufacturing costs, advantages of longevity and the Transportation as a Service (TaAS) model of ride sharing already prevalent in major cities through companies such as Uber and Lyft. Worldwide regulations to meet COP21 climate goals will accelerate the changeover process from Internal Combustion Engines (ICE) to EV’s.₉
• Natural Gas will experience competition from cheaper renewable technologies such as Solar PV and On-Shore wind for power generation. Both renewable technologies will prove less costly to install, maintain and operate than conventional natural gas by 2020. According to Business Insider and Morgan Stanley, Solar and Wind “will be the cheapest source of power in the world in less than three years.”₁₀
• Battery Storage technology: “Demand for energy storage from the utility sector will grow more than the market anticipates by 2019-20,” the report from Morgan Stanley asserts. The demand for storage is expected to grow from a less than $300 million a year market to as much as $4 billion in the next two to three years. Battery Storage Technology will create conditions for “wind and solar to become a dependable rather than an unpredictable source of energy.”₁₁

The following paper collates the findings of the business press, analyses from major investment houses, think tanks, government agencies and academic studies into a document depicting the rapid shifts and disruptions occurring in the energy and transportation sectors across the United States and the globe. The document attempts to gather and illustrate the growing consensus of financial, energy and transportation analysts regarding the forthcoming and ineluctable changeover from a fossil-fuel based economy to a system powered by renewable resources and the technology designed to capture, distribute, store and operate in the forthcoming new energy economy. While this document depicts a snapshot of market conditions in late 2017, the rapid shift toward energy sectors dominated by renewable energy technologies will only accelerate across the globe, leaving incumbent fuel sources and equipment with ever diminishing roles, moving to unviability and eventual elimination from the economy.

Thoroughly footnoted and utilizing reporting and analyses from esteemed outlets and organizations, the document outlines the multiplicity of reasons investors, especially cities, their operating budgets and their attendant pension funds should heed the gathering trend lines and begin the process of divesting from the fossil fuel energy sector. With renewables poised to gain increasing market shares, the oil, coal and gas sectors will undergo reduced demand trending toward zero due to economic and regulatory pressures from markets and government respectively, leaving assets in the ground and facilities designed to explore, mine, process and burn fossil fuels increasingly diminished in value and heading towards non-utilization, stranding and worthlessness.

The Forthcoming 21^st Century Renewable Energy Systems Revolution

Climate change poses the greatest challenge for humanity in the 21^st century. In fact, 17 of the warmest measured years have occurred over the past 18 and 2016 was the hottest yet.₁ Global warming and resultant climate change will continue unabated unless steps are taken to quickly diminish and end carbon emissions from the burning of coal, oil and gas for energy production and transportation.

In the UN COP21 agreement from 2015, the 194 signatories approved a framework to keep carbon dioxide emissions below a threshold to prevent dangerous temperature rise and trigger cataclysmic weather events.  At the existing rate of carbon consumption, the planet will reach 450 ppm by 2036₂ and cause the overall temperature of the planet to rise 2 C or 3.6F, triggering destructive effects to our environment and creating planetary conditions hostile to life in its present form.₃ As of October 4th, NOAA reports the planet’s temperature has risen to 1.25 C above pre-Industrial Revolution levels.₄ Many scientists such as the former NASA climate scientist James Hansen believe global temperatures should be kept below 1.5 C.₅ With approximately 8 -10 years remaining before the 1.5C threshold is breached, societies must act quickly to limit further damage.₆

With the arrival of renewable energy technologies, the opportunity to mitigate and prevent further CO₂ emissions, warming and catastrophic climate change has proved cost effective and increasingly competitive in the market place.₇ Alternative technologies such as on-shore wind, solar PV, LED’s, hybrid and electric vehicles and battery storage technology are gaining in market share and their manufacturing costs have fallen and will continue to fall, making renewable solutions more attractive for widespread utilization.₈ As of 2016, solar and wind are now competitive or lower in cost to install and operate than natural gas for energy production. According to Bloomberg News, “The reason solar-power generation will increasingly dominate: It’s a technology, not a fuel. As such, efficiency increases and prices fall as time goes on. What’s more, the price of batteries to store solar power when the sun isn’t shining is falling in a similarly stunning arc.”₉

Even with the Trump administration vowing to repeal impending regulations including the Clean Power Plan or withdraw from the COP21 Paris Accords which he legally can’t do for 3-4 years,₁₀ the increasing, global use of renewable and energy conserving technologies will further reduce the demand for carbon-based fuels. Litigation to prevent the Trump administration’s roll back of climate mitigation strategies will occur and could maintain certain Obama era regulations in place.₁₁ Meanwhile, as demand for coal, oil and gas declines, a Carbon Bubble will inflate over the energy sector.₁₂

A Carbon Bubble develops once the in-ground assets of fossil fuel companies are regarded as overvalued and overpriced, leading to a potential “rushing for the exits” to abandon aforementioned investments. ₁₃ As much of a fossil fuel company’s financial valuation lies in the companies “booked reserves”, the inability of the companies to mine, process, sell and/or burn those “booked” carbon reserves place’s their long-term stock price in jeopardy.

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