It is generally assumed that demand for fossil fuels is set to decline sharply due to governmental and corporate environmental commitments, with only the extent and rapidity of this decline open to question. So, we are left wondering which companies are likely to survive, let alone thrive, as we transition through to a carbon neutral future.
For investors, we think it could pay to play devil’s advocate on this score. Perhaps the energy companies best placed to grow their earnings over the long haul are those that have made relatively modest, hence less disruptive, commitments on their environmental policies. ExxonMobil (US:XOM) and Chevron Corp (US:CVX) readily spring to mind.
There are reasons why investors need to be a little more circumspect regarding the prevailing narrative on fossil fuels. The transition may not be as seamless as advocates for renewable energy would have us believe.
In the same week that BP’s (BP.) chief executive, Bernard Looney, was setting out plans to dramatically alter the group’s business model, the richest state in the richest country on Earth was being hit by a series of rolling blackouts, with utilities ordered to implement 'load shedding’ arrangements, whereby energy supply was curtailed to selected customers to avoid a complete collapse of the grid.
Californians are now feeling the effects of environmental mandates that aim to shut down many of the Sunshine State’s natural-gas power plants in favour of solar and wind energy initiatives. It is the leading US state in terms of energy production from solar, geothermal and biomass resources. And it also has one of the lowest per capita rates of energy consumption. Yet, even though unit energy prices for renewables are falling, the state’s energy prices are approaching double that of the US national average, forcing out businesses and disproportionately impacting low-income families and neighbourhoods. It has not been a painless transition.
Matters have not been helped by the recent wildfires, but the blackouts primarily reflect a deteriorating imbalance of electricity generation and consumption. As the proportion of California’s energy derived from renewable sources has expanded, the inherent shortcomings of renewable energy generation and – above all – storage have become more apparent.
You could say that solar power has been a success story in California over the past decade, not surprising given the climate. But as its share of the grid increases, so does the shortfall in power generation once the sun goes down. The timeframes for peak electricity demand wax and wane with the seasons, but power demand climbs as people return home and domestic appliances are switched on. Ironically, California has become gradually more reliant on natural gas and energy imports to make up a growing shortfall during the evening, with the underlying imbalance set to continue.
The Solar Energy Industries Association estimates that 20 per cent of all electricity produced in the state was powered by the sun during 2019, with 27,400 megawatts of solar capacity installed. But the state has mandated that 60 per cent of its electricity will come from renewable energy by 2030. Short of any major breakthrough in battery storage technology, the pressure on California’s grid will continue to increase, particularly if options for importing power from neighbouring states are stymied as they, too, move towards a sustainable generation model.
Closer to home, France – which utilises nuclear power for most of its energy—has the lowest carbon emissions in Europe, whereas Germany has made huge investments in wind and solar, yet consumes as much fossil fuel as it did 30 years ago, and is increasingly dependent on foreign (ie Russian) gas.
Last year, around 11 per cent of global primary energy came from renewable technologies, but the lion’s share of that figure is linked to hydroelectric power generation. It will take more than government mandates (such as the European Union’s new line on carbon credits) and corporate pledges to make wind and solar generation viable options on a grand scale. The trouble is that the debate on renewables, like so much else nowadays, has become completely polarised, with pragmatism pushed to the sidelines. It is easy to get caught up in the headlines, but investors should consider what is happening in California before they ditch fossil fuels altogether.
