Energy Could climate policy lead to convergence of the energy and utility sectors?

In our next "big idea" note, we look beyond the obvious renewable growth and ask if climate policy could lead to convergence of the energy and utility sectors.

14 Jan 2020

The challenge of the 2020s: how to get the clean energy transition 'on track'

2019 was the year the world woke up to the climate challenge, triggered by:

  1. a very challenging IPCC report in 2018;
  2. a run of very hot summers; and
  3. increasing visibility of extreme weather events.

During the year, 68 countries began exploring or adopted an official "net zero" target for 2050. Our view? These targets offer too little, too late… and so the world will most likely not avoid dangerous climate change. But in this note, a Global Energy Outlook for the 2020s, we look at how we might be wrong.

The inevitable answer: there is $10 trillion of fossil capex we must NOT spend

What we conclude is that to reach net zero, the world may start to impose restrictions on new fossil fuel investment. Not complete restrictions and not overnight … but enough to reduce cumulative fossil capex by about $10 trillion from now to 2050, or about two-thirds of what we would expect to invest at the current run rate. The question is how those restrictions might come about? And our view is that legal and financing restrictions look much more likely to do the job than any coordinated global carbon tax.

How would this work? By policy 'contagion' … not by global coordination

The problem with a global carbon tax is that countries must act together – as imposing a unilateral tax can be economically damaging. And although there are exceptions (such as the Montreal Protocol in 1987, banning CFCs), most attempts at globally coordinated green policies until now have not worked well, including unsuccessful efforts to achieve a global carbon tax at the COP 25 meetings in Madrid. So we think we are more likely to see legal and financing restrictions on fossil capex, with the leaders who introduce these first achieving sufficient political success for others to follow suit.

What does all this mean for investors? Four key conclusions in this note

  1. The renewables boom continues; annual additions must climb to 4-5x current levels; the race is on to become global 'wind and solar majors';
  2. New capex is likely to come quickly from the oil & gas sector (as fossil restrictions spread to more and more jurisdictions), in turn driving more competition for projects/auctions;
  3. A fundamental revaluation of downstream activities, as the value of vertical integration increases and demand-side adaptation begins;
  4. Continued, significant efforts by Energy and Utility companies to redefine their business portfolios to deliver the energy transition.

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