Civil insurrection is nothing new in Paris, but it would be instructive to learn whether the protestors made any impression on the delegates currently attending the UN climate summit in Poland, the European Union’s (EU) biggest coal producer. It would be foolish if policymakers viewed the protests in isolation, as they serve to remind us that the poorest sections of society can suffer disproportionately through the imposition of green taxes on energy.
France is committed to phasing out the sale of vehicles powered by the internal combustion engine by 2040, while Parisian authorities plan to banish all petrol and diesel-fuelled cars from the city by 2030. These are ambitious and commendable targets, but the public policy decisions that gave rise to the gilets jaunes disturbances are increasingly in evidence in the corporate sphere, so a danger exists that retail investors, like France’s rural poor, could be left on the hook for national commitments made in response to cross-border arrangements such as the Paris climate agreement.
At the beginning of the week, the Financial Times published excerpts of an interview with Royal Dutch Shell’s (RDSB) chief executive, Ben van Beurden, in which he outlined plans to link energy transition targets to the long-term incentive plans of senior Shell executives. The Anglo-Dutch group has been building the proportion of natural gas within its production mix, a process likely to accelerate once formal carbon emissions targets are in place, so it will be interesting to evaluate the contingency awards once they’re set out in the annual remuneration report.
We always thought that Shell’s pivot towards liquefied natural gas (LNG) was undertaken for purely commercial reasons rather than any environmental considerations, but perhaps they've become intertwined. The group is looking to exploit (and promote) the rapid increase in gas-powered electricity generation across the globe, although you could argue that this increase is largely in response to national commitments on climate change – in other words, a secondary effect.
Investors, particularly income-seekers, will be hoping that Shell has got its sums right. Under its Sustainable Development Strategy, the International Energy Agency (IEA) posits that gas-powered generation will supplant coal as a generating feedstock midway through the next decade, although in absolute terms it’s expected to peak in 2027 when “low-carbon sources take off”.
Last year, gas-fired power generation increased by 12.3 per cent in the EU, largely at the expense of coal because of low gas prices. But this 'transferability' is a doubled-edged sword, because if the IEA scenario plays out, then renewables could displace gas-powered generation over the intervening period, particularly if economies of scale keep on driving down the cost of solar and wind energy.
Around 44 per cent of the electricity consumed in the EU comes from power stations burning fossil fuels, while 30 per cent is derived from 'green' sources. If, as expected, these two figures start to coalesce, they present a potential challenge to Shell’s cash flows and profitability. Gas pricing – or ‘hub’ pricing – has always been a contentious and somewhat opaque issue, as consumers have regularly found to their cost. Supply contracts to electricity generators are usually long-term affairs with in-built protections for counterparties, which provides a degree of predictability for wholesale suppliers. Bosses at Shell reckon fundamentals point to medium-term support, taking the view that major investment in LNG is still required to match demand growth in the early part of the next decade, even though the global market is still absorbing supplies from a wave of LNG mega-projects in Australia.
The question is what happens to LNG prices if generators feel they can adequately match supply with demand primarily from ever cheaper renewable sources? It’s little wonder that Shell has taken the decision to offer power supply directly to end users in the UK’s industrial and commercial sector.
