The signs don’t look favorable for carbon dioxide emissions controls in the U.S. The Trump administra-tion along with much of the Republican party clearly do not believe in climate change in ways that comport with scientific consensus. As a result we should expect federal policy efforts to be directed elsewhere.
However, the new acting head of the Environmental Protection Agency, following Scott Pruitt's long anticipated departure, is Andrew Wheeler, former energy lobbyist. Interestingly he has conceded that the 2009 court decision that requires the EPA to regulate carbon dioxide emissions is “settled law.” How aggressively the agency interprets and ultimately enforces its mandate bears watching.
Looking at energy policy changes further north in Canada, populist Doug Ford, the new premier of On-tario, recently fired the province's chief scientist, eliminated the ministry of science and innovation and ended the provincial cap and trade market. If he were looking to align provincial energy policy with that of the Trump administration he could not have done better.
At a broader level, a report issued by the International Energy Agency (IEA) showed surprisingly that overall energy investment in 2017 declined 2% from the previous year. However investment in renewa-ble power fell by a more substantial 7% (from $318 down to $298 billion). Bloomberg's survey of in-vestment in clean energy (not the same definition as the IEA's) also declined by 1% in the first six months of 2018.
The decline in capital spending for new energy investments was featured in headlines in both instances. What wasn't emphasized was that the cost of renewables declined substantially (maybe by 15%) in 2017. And spending on energy efficiency rose to $236 billion (up 3%). Related: Is This The Next Global Leader In Ride Hailing Services?
Given our present energy mix this also suggests a continued, diminishing reliance on fossil fuel. And that shift is likely to continue. Coal fired power generating capacity is presently being displaced by nat-ural gas fired generation. Gas and renewables will then resume the fight for market share. The result should be advantageous both for the environment (less CO2) and for consumers (cheaper energy). But whether this is equally advantageous for energy investors remains to be seen.
Looking at future energy needs, developments in the electric vehicle market need to be considered. Most major car manufacturers have committed to producing electric vehicles within five years with some even eliminating entirely sale of internal combustion vehicles. Transportation accounts for about 70% of U.S. oil consumption.
We cannot predict the rate at which consumers adopt or the infrastructure evolves to accommodate electric vehicles. But this does suggest a probable increase in market penetration of electric vehicles. For oil and gasoline consumption this is a zero sum game.
We can consider this the great migration. The entire transportation sector is migrating from internal combustion to battery power. And as this occurs, at whatever pace, oil usage will inevitably be replaced by increased usage of electricity.
The incremental energy demand of the transportation sector on the electric grid is significant. An in-dustry taking this seriously would be expected to be in the midst of a large construction boom. In the U.S., only two nuclear plants are under construction and nothing else is scheduled. All other major in-cremental power generating facilities in planning or construction will be gas-fired or renewable. At the same time numerous coal-fired power plants will be retired.
Given the difficulty and expense of siting, planning and completing large coal-fired or nuclear facilities, we see little chance that the electric power generation industry will recommit to large, central station power generation. In addition the uncertain long term economics of wholesale power prices also war-rants caution with respect to capital expenditures of this type.
Interestingly, one of the ready sources of utility capital on a virtual global basis has been large pensions and sovereign wealth funds. Unfortunately for the electric utility industry, this group of previously will-ing investors are now being pressured to divest its coal and oil investments. Norway’s sovereign wealth fund, the largest in the world, has adopted a no-fossil fuel policy — ironic given that exploitation of Norway’s oil and gas resources made the fund possible. The Church of England recently joined the list of investors shunning fossil fuels—also ironic because the present Archbishop of Canterbury spent 11 years in the oil industry before joining the church. If more big funds succumb to this type of pressure, the number of potential buyers for energy securities declines and the cost of capital will likely rise. For investors this is typically seen as a negative. Related: Houston To Overtake Cushing As Key Hub
The bottom line? Politics aside the electric utility industry will continue to move in the direction of lower carbon emissions, especially since many state governments are pushing for decarbonization de-spite lack of Federal encouragement. The displacement of coal fired power generation by natural gas alone ensures that outcome even before considering the salutary environmental benefits of renewables. At the same time the electric utility industry will gradually enable electrification of vehicular transpor-tation, our so called great migration.
Powering a car battery with electricity from an old, unscrubbed coal fired power plant does little that is positive for the environment. But whether the acceptance of electric vehicles also encourages the more rapid adoption of cleaner sources of energy production remains to be seen.
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But whatever the adoption rate, renewable energy costs continue to decline and the area attracts funds for research and development. Capital costs should be expected to decline for greener projects. Over time the correct ecological choice is also the correct economic choice.
By Leonard Hyman and Bill Tilles for Oilprice.com
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