Transitioning to a low-carbon future is essential to meet our long-term climate goals. Achieving our ambitions set out in the Paris Agreement, including limiting warming to well under 2C and preferably 1.5C, requires an energy shift. According to an article in Nature, a third of oil reserves, half of gas reserves and over 80% of coal reserves must remain unused for this to happen. Naturally, this means mass investment into renewable energy must happen, and fast.
The Downfall of “Traditional” Energy Giants?
Highly polluting fossil fuel energy companies have always been the largest. Most people are familiar with the giants such as Shell, BP and Exxon (each earning at least $260 billion in revenue for 2019). While some at least try to move towards lower emissions, even if only for reputational purposes, others have not followed. In recent weeks, leaked documents from Exxon showed internal carbon emissions projections over the next five years to increase by 17%. Much like other companies, Exxon does not publicise projections for investors but rather gives them past figures. Such limited disclosures make it “harder to judge the feasibility of plans to adapt to climate change or to track progress on long-term emissions goals.” This is a dangerous game to play, especially with the rise of sustainable investing. At the start of October, the Church of England Pensions Board, responsible for managing £2.8 billion, dumped all their Exxon shares in a bid to divest from polluting companies. This could be the start of a mass exodus. Earlier this year, BlackRock, with over $7 trillion in assets under management, joined the Climate Action 100+ investment group having faced criticism over their own approach to climate change. BlackRock owns roughly 6.8% of Exxon and the Climate Action 100+ group manages over $41 trillion. With such enormous sums of money at risk of withdrawal, oil companies should enhance transparency through disclosure and work towards a long-term emissions reduction plan.
COVID has worsened the situation for oil companies significantly. In April, as the lack of demand, due to grounded flights and less car use, hit, oil prices turned negative momentarily. The continued production with fewer buyers certainly placed a strain on many companies. Occidental Petroleum had to pay major shareholders their quarterly dividend (totalling $200 million) in shares rather than cash due to mounting debt and limited income. This situation has raised doubts about the end of oil. Previously, the peak oil scenario was expected. That is, oil production would begin a long decline that resulted in dramatically inflated prices. The opposite scenario is now gaining traction, an argument based upon the increasing popularity, affordability and government support of clean energy alternatives which limit oil demand. Perhaps surprisingly, such a scenario has even been discussed by investment banks. The global head of commodities research at Goldman Sachs said, in a report published this year, that COVID would “permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalises and shift the debate around climate change.”
The Rise of Clean Energy Companies
In October, NextEra Energy, the world’s largest producer of wind and solar power surpassed the valuations of oil giants Chevron and Exxon, tipping the scales at around $146 billion and crowning them the most valuable energy company in the US. Expansion in their capacity to power homes combined with aggressive investments has seen their stock price rocket by over 20% so far this year. Now, with clean energy very much moving towards the mainstream, other companies will follow. The International Energy Agency (IEA) recently confirmed that solar power is at its cheapest price ever in most countries, making it more affordable than plants fired by coal and natural gas. They also noted that cheaper prices along with “government efforts to slash climate-damaging emissions will increasingly push coal off the grid and give renewables 80% of the market for new power generation by 2030.” Solar is 20-50% cheaper now than the IEA estimated last year, depending on the region. In Europe and the US, typical costs range from £30-60/MWh, whilst that figure in China and India is around $20-40/MWh due to ‘revenue support mechanisms.’
However, progress is not just solar. In the same report, the IEA also significantly raised the outlook for wind by 16% in 2040. Large reductions in the cost of both onshore and offshore wind, in part due to access to lower-cost finance, make it far more viable. In the UK, the Prime Minister pledged to make the UK “the world leader in clean wind energy”, with a £160 million investment to increase capacity to potentially power every home in the UK by 2030. While this announcement was scrutinised, providing such grandiose targets is a step in the right direction. Indeed, companies focusing on wind have benefitted significantly this year. Orsted, an energy provider, and Vestas, a wind turbine manufacturer, have both nearly doubled their share price since yearly lows in March. Of course, government support will certainly shape the progress of clean energy companies. For example, China’s recent and sudden net-zero 2060 pledge has seen several solar companies gain over 40% in a couple of weeks. With this goal estimated to cost anywhere between $5 trillion and $15 trillion, this could be just the start of a much larger, long-term rally. Equally, an important milestone is rapidly approaching in the US. The gain in clean energy stocks in recent weeks would appear to show that investors and traders are backing a Biden win in the Election. Since Democrats have shown a much greater desire to tackle climate change, this price movement is logical and could continue if that result does occur (and would likely drop if Trump wins).
Companies focusing solely on highly polluting energy rather than transitioning to low-carbon alternatives may suffer the consequences. Major reputational damage could occur, and vital shareholders could withdraw funds to align with sustainability goals. Indeed, we have already seen some oil majors such as Exxon lose as much as 50% of their share price since January. With coronavirus dramatically impacting oil production, now is an opportunity for governments and investors alike to fund clean energy companies that will provide desirable returns while limiting environmental destruction.