TIM BUCKLEY. The Global Energy Transformation is Well Underway

May 30, 2019

Improved technology and economies of scale are driving rapidly falling costs of renewable energy. As a result financial institutions and energy corporates are fleeing coal and coal facilities are becoming stranded assets. Government policies in China and India and other Asian nations are reinforcing this trend. Australia must prepare for the inevitable technology driven disruption.

The global energy sector transformation is well underway, accelerating as the threat of more frequent, more extreme weather events highlights the urgent need for decarbonisation.

The energy transformation is being driven by compounding factors accelerating the disruption. These include technological change driving the economics of renewables below electricity grid parity, and global capital markets increasingly fleeing thermal coal. As a result, climate and energy policies of key countries and leading corporates are looking to reposition themselves. Then there is China, seeking to lead the next industrial revolution.

The global energy transformation is a technology driven disruption. Energy efficiency gains have seen a decoupling of economic growth and energy demand, while renewable energy costs are reaching grid parity in an increasing number of key markets globally.

Increasingly, cost competitive electric vehicles are driving a convergence of the transportation and power sectors, with electrification providing countries like China, Japan, South Korea and India an opportunity to reduce reliance on fossil fuel imports. This in turn builds energy security (potentially redefining the geo-political landscape in the Middle East) whilst also helping to combat growing air and water pollution pressures.

The Economics of Renewables Are Working

The global energy transformation is being driven by the combination of accelerating technology innovation and economies of scale.

This has seen the cost of electricity generated by wind farms drop by 50% this decade, while solar costs have declined by well over 80%. Offshore wind is set for a similar deflationary cost trajectory. Lithium ion batteries have likewise dropped over 50% in the last three years, putting electric vehicles on a path to displace internal combustion engines this coming decade.

The four largest electricity markets in the world are China, America, India and Japan. While solar costs are down 50% in the last four years in Japan, they are still well above grid parity. In contrast, both America and India saw renewable energy go below grid parity with thermal power in 2017. At the same time, China is on target to achieve grid parity by 2020. With continuing solar cost deflation of some 10% annually, these trends will continue.

Analysts have long debated the hypothesis that renewables would create a wave of stranded fossil fuel assets. This is now playing out. As a leading market for renewables, India is now grappling with some US$60bn of thermal power projects in financial distress, unable to compete with low cost renewables and hence repay loans.

Global Capital is Fleeing Coal

The Institute for Energy Economics and Financial Analysis (IEEFA) has tracked the number of globally significant financial institutions that have introduced polices to restrict lending, insurance and investing in thermal coal mines and coal-fired power plants.

Most recently in May 2019, Japan’s Mizuho Financial Group and Mitsubishi UFG Financial Group both announced coal lending restrictions. This built on similar announcements in April 2019 by Singapore’s three leading banks: Development Bank of Singapore (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).

To date, 112 globally significant financial institutions are exiting coal. Of the top forty global banks, 45% now have coal lending prohibitions.

While such major policy announcements were happening every two weeks during 2018, new announcements from global financial institutions exiting coal are now occurring every week to date in 2019.

This capital flight from the coal sector is resulting in proposals like Adani’s proposed Carmichael thermal coal mine in Queensland being unable to find external finance.

Government Policies are Reinforcing the Trend Away from Coal

In 2015, India set a target to build 175 gigawatts (GW) of renewables by 2022. Three years later, India’s Energy Minister RK Singh lifted India’s target to 500GW by 2030. Aspirational? Certainly. But global capital is endorsing this new low-cost solution.

India is not alone. South Korea recently set a target to build 58GW of renewables by 2030, while Taiwan set a target of 27GW by 2025.

Dealing with chronic, growing air pollution is a key driver, as is energy security. But increasingly, the low cost of renewables is also making the targets a sensible economic proposition.

Earlier in 2019, Thailand introduced a new energy plan to 2037, and coal market’s share target was halved to just 12%. That Thailand is also jumping onto the renewable bandwagon is not what the coal industry was expecting.

Leading Corporates are Pivoting Away from Coal

In May 2019 BHP announced it would no longer invest in thermal coal. The technology landscape had moved on, and the need to decarbonise to achieve the Paris Agreement means BHP sees thermal coal as increasingly obsolete.

BHP is slow to this new perspective. Rio Tinto completed its global exit from coal in 2018, having taken advantage of buyer interest to exit without significant losses since 2014.

Australia’s leading industrial conglomerate announced acquisition plans in both lithium and rare earths in May 2019, both key inputs into low carbon emission industries. Wesfarmers also completed its exit from coal mining in 2018, an industry it had participated in for several decades.

The Commonwealth Bank also recently announced it was the first Australian signatory to RE100, a global corporate leadership initiative bringing together influential businesses committed to 100% renewable electricity.

China Plans to Dominate this Industrial Revolution

China installed 45-50% of all solar globally in both 2017 and 2018. Nine of the ten biggest solar companies are domiciled in China. China accounted for half of all electric vehicle sales globally in 2018. And China is the world’s largest miner and processor of lithium and rare earths.

China is on a clear path towards decarbonisation, driven in part by its need to address air pollution. In fact, China is the world leader in zero emission technologies of the future.

In May 2019 China’s National Development and Reform Commission announced a tender for 21GW of renewable energy, an investment program of US$25bn. Not only is this the largest renewable energy investment in global history, but the tender is a landmark for China; there is no subsidy support.

With this, China will reach its target of grid parity for both wind and solar by 2020.

Where to next?

IEEFA views the combination of technology, economics, finance, energy security and the global need to deliver on the Paris Agreement as underpinning a progressive decarbonisation of global energy markets. Reduced air pollution and deflationary renewables are two added benefits that make this trend inevitable. Now, we just need to deliver this in time to limit global warming before it is too late.

It is time for Australia to prepare for the inevitable technology driven energy disruption that is occurring.

Tim Buckley (tbuckley@ieefa.org) has over 30 years’ financial markets experience covering Australian, Asian and global equities, including as Managing Director with Citigroup and previously with Australasian Equity Research. As Director of Energy Finance Studies with the not-for-profit think-tank, the Institute for Energy Economics and Financial Analysis (IEEFA), Tim provides financial analysis of the electricity sector, studying energy efficiency, renewables and stranded asset risk in Australia and across South Asia.

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