Energy Subsidies: The Case for a Level Playing Field

Energy Subsidies: The Case for a Level Playing Field | 02/02/15
by John Brian Shannon John Brian Shannon

By now, we’re all aware of the threat to the well-being of life on this planet posed by our massive use of fossil fuels and the various ways we might attempt to reduce the rate of CO2 increase in our atmosphere.

Divestment in fossil fuels is under discussion — as one way to lower our massive carbon emissions

The case for divestment generally flows along these lines;
By making investment in fossil fuels seem unethical, investors will gradually move away from fossil fuels into other investments, leaving behind a smaller, but hardcore cohort of fossil fuel investors.

Resulting (in theory) in a gradual decline in the total global investment in fossil fuels, thereby lowering consumption and CO2 additions to the atmosphere. So the thinking goes.

It worked well in the case of tobacco, a few decades back. Over time, fewer people wanted their names or fund associated with the tobacco industry — so that the tobacco industry is now a shadow of its former self.

Interestingly, Solaris (a hybridized tobacco plant) is being grown and processed into biofuel to power South African Airways (SAA) jets. They expect all flights to be fully powered by tobacco biofuel within a few years, cutting their CO2 emissions in half. Read more about that here.

Another way to curtail carbon emissions is to remove the massive fossil fuel subsidies

In 2014, the total global fossil fuel subsidy amounted to $548 billion dollars according to the IISD (International Institute for Sustainable Development) although it was projected to hit $600 billion before the oil price crash began in September. The global fossil fuel subsidy amount totalled $550 billion dollars in 2013. For 2012, it totalled $525 billion dollars. (These aren’t secret numbers, they’re easily viewed at the IEA and major news sites such as Reuters and Bloomberg)

Yes, removing those subsidies would do much to lower our carbon emissions as many oil and gas wells, pipelines, refineries and port facilities would suddenly become hugely uneconomic.

We don’t recognize them for the white elephants they are, because they are obscured by mountains of cash.

And there are powerful lobby groups dedicated to keeping those massive subsidies in place. Ergo, those subsidies likely aren’t going away, anytime soon.

Reducing our CO2 footprint via a carbon tax scheme

But for all of the talk… not much has happened.

The fossil fuel industry will spin this for decades, trying to get the world to come to contretemps on the *exact dollar amount* of fossil fuel damage to the environment.

Long before any agreement is reached we will be as lobsters in a pot due to global warming.

And know that there are powerful lobby groups dedicated to keeping a carbon tax from ever seeing the light of day.

The Third Option: Levelling the Subsidy Playing Field

  • Continue fossil fuel subsidies at the same level and not institute a carbon tax.
  • Quickly ramp-up renewable energy subsidies to match existing fossil fuel subsidies.

Both divestment in fossil fuels and reducing fossil fuel subsidies attempt to lower our total CO2 emissions by (1) reducing fossil fuel industry revenues while (2) a carbon tax attempts to lower our total CO2 use/emissions by increasing spending for the fossil fuel industry

I prefer (3) a revenue-neutral and spending-neutral solution (from the oil company’s perspective) to lower our CO2 use/emissions.

So far, there are no (known) powerful fossil fuel lobby groups dedicated to preventing renewable energy from receiving the same annual subsidy levels as the fossil fuel industry.

Imagine how hypocritical the fossil fuel industry would look if it attempted to block renewable energy subsidies set to the same level as fossil fuel subsidies.

Renewable energy received 1/4 of the total global subsidy amount enjoyed by fossil fuel (2014)

Global Energy Subsidies (2014, in billions USD). Image courtesy of IISD.
Global Energy Subsidies 2014. (billions USD). Image courtesy of IISD.

Were governments to decide that renewable energy could receive the same global, annual subsidy as the fossil fuel industry, a number of things would begin to happen;

  • Say goodbye to high unemployment.
  • Say goodbye to the dirtiest fossil projects.
  • Immediate lowering of CO2 emissions.
  • Less imported foreign oil.
  • Cleaner air in cities.
  • Sharp decline in healthcare costs.
  • Democratization of energy through all socio-economic groups.

Summary

Even discounting the global externality cost of fossil fuel (which some commentators have placed at up to $2 trillion per year) the global, annual $548 billion fossil fuel subsidy promotes an unfair marketplace advantage.

But instead of punishing the fossil fuel industry for supplying us with reliable energy for decades (by taking away ‘their’ subsidies) or by placing on them the burden of a huge carbon tax (one that reflects the true cost of the fossil fuel externality) I suggest that we simply match the renewable energy subsidy to the fossil subsidy… and let both compete on a level playing field in the international marketplace.

Assuming a level playing field; May the best competitor win!

By matching renewable energy subsidies to fossil fuel subsidies, ‘Energy Darwinism’ will reward the better energy solution

My opinion is that renewable energy will win hands down and that we will exceed our clean air goals over time — and stop global warming in its tracks.

Not only that, but we will create hundreds of thousands of clean energy jobs and accrue other benefits during the transition to renewable energy. We will also lower healthcare spending, agricultural damage, and lower damage to steel and concrete infrastructure from acid rain.

In the best-case future: ‘Oil & Gas companies’ will simply become known as ‘Energy companies’

Investors will simply migrate from fossil fuel energy stock, to renewable energy stock, within the same energy company or group of energy companies.

At the advent of scheduled airline transportation nearly a century ago, the smart railway companies bought existing airlines (or created their own airlines) and kept their traditional investors and gained new ones.

Likewise, smart oil and gas companies, should now buy existing renewable energy companies (or create their own renewable energy companies) and keep their traditional investors and gain new ones.

Related Articles:

Fossil Fuels and Utilities At Risk In New Report — Energy Darwinism At Work

by Giles Parkinson

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Originally published on RenewEconomy

A major new report from investment banking giant Citi has highlighted the dramatic changes sweeping the world’s energy industry, and is being used as a clarion call to review the estimated $37 trillion that will be invested in energy infrastructure and projects over the coming two decades.

In a study titled “Energy Darwinism – the evolution of the energy industry“ – Citi says the global energy mix is shifting more rapidly than is widely appreciated, and this has major implications for generators, utilities, and consumers, and for exporters of fossil fuels such as Australia.

“Consumers face economically viable choices and alternatives in the coming years which were not foreseen 5 years ago,” the analysts write – pointing mostly to the “alarming” falls in the cost of solar.

It says the pace of change in the last five years has been dramatic and will likely accelerate, not slow. These changes will flow through to suppliers. Conventional fuels and technologies are likely to be substituted, or suffer reduced demand in the best case scenario.

(It should be noted here that the six analysts involved are the managing directors of research in Citi’s mining, oil and gas, utilities, commodities and alternative energy sectors, so they are not just a band of beatific beatniks).

Citi says fossil fuels further up the cost curve are most at risk, and new projects built now will face competition with new technologies within the first quarter of their anticipated 25-year life. “These project entail significantly more risk than is widely recognised,” the analysts write.

“There will always be more subjective choice factors involved such as fuel diversity and energy independence that may offset cold, hard economics, but investors, companies and governments must consider the sea change that we believe is only just beginning. “

It says utilities are most at risk because the “very nature” of their business is likely to change. Utilities in their current form could lose half their addressable market to energy efficiency, solar and storage, and other distributed generation.

“Renewables and decentralised energy are impacting not only how utilities can earn money, but also what they do to earn this money,” Citi says. “There are opportunities for new avenues for investment and growth in terms of smart grid, storage, and downstream services. “The question is whether utilities grasp that opportunity and evolve themselves.”

Perhaps the key graph in the report is this one below. It doesn’t mean much at first glance, but Citi says it is critical for understanding the factors at play.

.citi-darwin

In the first quartile it notes that gas (the light grey line) dominates the first quartile of the integrated cost curve, largely thanks to the advent of shale.  So that is probably true of the US, but not many other places (in Australia, gas is really expensive, or about to be). The key is what happens in the other quartiles.

In the final quartile, it notes that solar is already intersecting with gas, which is why utilities in the US are dumping plans for peaking gas stations in favour of solar (red line). And this also means that solar steal the most valuable part of the electricity generation curve because it produces during the day when prices are highest.

This is already impacting Germany, where gas is expensive and gas-fired generators are going out of business, and it might have cited Australia too, where returns for incumbent fossil fuel generators are falling dramatically and so it their running time. Wind farms such as Collgar in WA are running at higher capacity factors than black coal generators in NSW.

Citi notes that wind (orange line) is already overshadowing coal (black) in the second quartile. But here’s the conclusion that will stun those locked into a conventional view of generation: Citi says that while wind’s intermittency is an issue, with more widespread national adoption it begins to exhibit more baseload characteristics (i.e. it runs more continuously on an aggregated basis). “Hence it becomes a viable option, without the risk of low utilisation rates in developed markets, commodity price risk or associated cost of carbon risks.”

Citi notes that solar is exhibiting “alarming” (for whom!?!?!?)  learning rates of around 30 per cent (that is for every doubling of installed capacity). Wind is evolving at a slower ‘mechanical’ learning rate of 7.4 per cent, and gas is evolving due to the emergence of fracking and the gradual development and improvement of new extraction technologies.

But Citi says that coal is using largely unchanged practices and shows nothing like the same pace of evolution as the other electricity generation fuels or technologies. It notes nuclear has seen its costs rise in developed markets since the 1970’s, largely due to increased safety requirements and smaller build-out.

As Citi notes: “Thus is not a ‘tomorrow’ story. We are already seeing utilities altering investment plans, even in the shale-driven U.S., with examples of utilities switching plans for peak-shaving gas plants, and installing solar farms in their stead,” it says.

“The same is true for other fuels, for example the reluctance on the part of utilities to build new nuclear in the UK, or the avoidance of coal in some markets due to uncertainty over pricing, likely utilisation rates and or pollution.

“Even in China, we believe that coal demand is likely to peak this decade as its generation mix starts to shift,” it says. It notes India’s coal demand will grow much slow than expected, and nuclear – and the capital costs involved – make it unsuitable for markets with such uncertainty.

On solar, Citi says the price fall of solar panels has exceeded all expectations, resulting in cost parity being achieved in certain areas much more quickly. “The key point about the future is that these fast ‘learning rates’ are likely to continue, meaning that the technology just keeps getting cheaper. At the same time, the alternatives of conventional fossil fuels are likely to gradually become more expensive.”

On wind, it says technology is evolving more slowly than solar but it has the advantages of offering more ‘base-load’-like characteristics in running more of the time, and perhaps most importantly is lower cost than solar, allowing the technology to compete against conventional generation at lower wholesale prices.

It says storage is still a nascent industry, but so was solar just 5 to 6 years ago. “The increasing levels of investment and the emergence of subsidy schemes which drive volumes could lead to similarly dramatic reductions in cost as those seen in solar, which would then drive the virtuous circle of improving economics and volume adoption,” it says.

And how fast can evolution take place? Citi provides this graph below to illustrate the point.

.citi-waterfall

Citi says the history of the energy industry tells us that change is never gradual. New technologies are embraced at the expense of incumbents. Today, as conventional fuels become gradually more scarce and expensive and as new technologies improve, the long term transformation becomes ever more inevitable. It says it would be naive to think otherwise.

“If we look at the situation facing European utilities, the future looks particularly challenging, given a potential halving of their addressable market, an ageing fleet, and deeper questions about what a utility will look like in 5, 10 or 20 years’ time,” it writes.

“In transportation, the emergence of electric vehicles, and more importantly the rise of oil to gas switching show that evolution is not restricted to the power generation market.”

“Given the long term nature of upstream fossil fuel and power generation projects, this substitutional process and the relative pace of evolution is vitally important to understand.

“The sums of capital being invested are vast; the International Energy Agency (IEA) forecast that $37 trillion will be invested in primary energy between 2012 and 2035, with $10 trillion of that in power generation alone. Clearly the value at risk from plant or the fuels that supply them becoming uneconomic in certain regions, both in terms of upstream assets and power generation, is enormous.

“Quite simply the sums of money at stake in terms of investment in energy over the coming decades are staggering, and getting a choice of fuel or technology ‘wrong’ could have dramatic consequences for both countries and companies, be they upstream oil & gas companies, utilities, industrial consumers, renewable developers of power generation equipment providers.”

So, could someone please ensure that this report is stuck under the nose of Australia’s energy ministers, be they federal or state, and all the middle aged engineers and fossil-fuel careerists that advise them? And mark it Must Read.

(Author’s disclaimer: I am middle aged).

 

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This article, Fossil Fuels and Utilities At Risk In New Report — Energy Darwinism At Work, is syndicated from Clean Technica and is posted here with permission.

 

About the Author

Giles Parkinson is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia’s energy grid with great interest.

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