Measuring Climate Risk from the Bottom-Up Fossil companies ......Henrik Jeppesen, CFA, CAIA. Head of Investor Outreach North America. Carbon Tracker Initiative – June 13, 2018...

Henrik Jeppesen, CFA, CAIAHead of Investor Outreach North AmericaCarbon Tracker Initiative – June 13, 2018

[email protected]

Measuring Climate Risk from the Bottom-Up

Fossil companies that remain fossil are unattractive for investors

2

Challenging Business as Usual

www.carbontracker.org @carbonbubble #strandedassets

=> We can’t burn it allThe Carbon Bubble

3

Total 2˚C Carbon Budgetfor the fossil fuel industry

CO2 embedded in total reserves and resources owned by private & public companies

900 GtCO2

2860 GtCO2

Source: Unburnable Carbon report, Carbon Tracker, 2011

We compared ‘allowable’ carbon emissions in a carbon budget to 2050 with 80% probability of staying below 2˚C threshold with existing fossil fuel reserves.

Carbon Bubble Stranded Assets

-

200

400

600

800

1,000

1,200

1,400

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

Carbon emissions

(Gt)

Business as usual (NPS) Carbon budget

4

Climate financial risks

Companies are overstating energy demand, underestimating an increasing role for renewables and ignoring looming changes in

energy.

• the physical risks that arise from the increased frequency and severity of climate- and weather-related events that damage property and disrupt trade;

• the liability risks stemming from parties who have suffered loss from the effects of climate change seeking compensation from those they hold responsible; and

• the transition risks that can arise through a sudden and disorderly adjustment to a low carbon economy.

Source: Speeches by Mark Carney, Governor of the Bank of England

5

Energy is being disrupted by tech and learning

Source: Carbon Tracker

Normalised cost framework $/unit

0

5

10

15

20

25

2010 2012 2014 2016 2018 2020 2022 2024

Renewable Fossil

Subsidy needed

for renewables

Policymakers can tax the fossil externality

• Solar costs have been falling at 17% p.a. since 2010 and IRENA calculates the learning rate at 35%. In an ever wider range of locations, solar and wind are cheaper than fossil fuels.

• Battery costs have been falling at 20% p.a. since 2010 and by 2020 EV will be price comparable with oil cars.

• When renewables beat fossils, policymakers can move from subsidy to taxation.

• Cell phones … Emerging markets will adopt renewable based energy systems.

6

The energy consensus is wrong

…Yet

Companies are overstating energy demand, underestimating an increasing role for renewables and ignoring looming changes in

energy.

• The energy consensus is shaped by incumbents, expects business as usual, and makes four main errors.

• Costs … They expect renewable costs to stop falling rapidly.• Growth … So they expect a rapid slow-down in the growth of renewables.• Timing … So they do not expect peak fossils for another 30 years or so.• Significance … And they think that peaking demand is not important.

Source: Shell, BP, DNV, OPEC, Exxon, IEA, EIA. To end of modeling horizon

Annual growth rates of solar and wind

0%2%4%6%8%

10%12%14%16%18%

Actual 2017 DNV Shell Mountains BP Statoil Reform IEA New Policies OPEC EIA Globalenergy

Exxon

7

Source: Chevron, Managing climate change risks, a perspective for investors, 2017

Lower expected demand

Stranded AssetsWasted Capex

Pric

e: $

per

barr

el

Volume

Supply

OriginalDemand

ReducedDemand

P 1P 2

P1 = Original price

Illustration only – not drawn to scale

Relatively inexpensive assets. Still competitive at lower demand and prices.

Relatively expensive assets. Uncompetitive at lower demand and prices.

P2 = Reduced price

creates stranded assets

8

Cost curves assume economic logic

9

Oil & Gas upstream scenario analysis powered by Rystad’s Ucube with PRI

Source: 2-Degree of Separation, Carbon Tracker, Jun 2017www.2degreeseparation.com

① US$ 2.3 Trillion (~1/3) potential capex to 2025 is unneeded vs. Business as Usual.

② 2/3 of potential unneeded capex controlled by publicly traded companies.

2 Degrees of Separation

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Typically more expensive plants can refine a larger range of higher margin products.

=> Under 2°C scenario oil demand could fall 23% by 2035.

=> Industry margin decline $3.50/bbl causing industry EBITDA to drop ~50% by 2035.

Lower oil demand will reduce refinery margins

Source: Carbon Tracker Initiative, Margin Call, 2017 – margin data from Wood Mackenzie

Bullet point

Margin Call:Refining capacity in a 2ᵒ world

Falling oil demand and falling profit margins

11

Power Generation: relative profitability all-in costs

Relative profitability for Coal vs. new CCGT/ old CCGT.

Profit adjusted for Variable O&M Fixed O&M anticipated climate

costs (pollution tech control).

54% of EU coal currently runs at a loss

97% of EU Coal will be loss-making by 2030

Source: Carbon Tracker Initiative, Lignite of the Living Dead, 2017

EU: 2024 / US: 2021New wind will be cheaper than existing coal

EU: 2027 / US: 2023New solar PV will be cheaper than existing coal

12

Regulated markets have positive stranded values

2/3 of US coal capacity is regulated, making it highly profitable and thus could lose billions if the US complied with the Paris Agreement

Source: No Country for Coal Gen, Carbon Tracker (2017)

0

2,000

4,000

6,000

8,000

10,000

Sout

hern

Duk

eAE

PPP

LW

EC DTE

Dom

inio

nXc

elBe

rksh

ire H

.AE

SW

esta

rAm

eren

Firs

tEne

rgy

CM

SO

GE

NiS

ourc

eD

yneg

yG

reat

Pla

ins

NR

GVi

stra

Stra

nded

val

ue ($

m)

Stranded value for US coal power owners

Regulated % Merchant %

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

RW

EU

nipe

rEP

HC

EZEn

BWST

EAG

Vatte

nfal

lEn

gie

EDF

PPC

PGE

Taur

onEN

EA Enel

CE

Olte

nia

SA

Stra

nded

val

ue (€

m)

Stranded value EU coal power owners

Since most coal generation in the EU is loss-making, utilities could save money by retiring coal power in accordance with the Paris Agreement

Source: Lignite of the Living Dead, Carbon Tracker (2017)

13

We have seen some early victimsElectricity sector write-downs in Europe $bn

Source: IEA

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015 2016

• European electricity. $150 bn of write-downs and a fall in sector capitalisation of over $500bn.

• Global coal. Bankruptcy of sector leaders with near peak coal prices.• Machinery. Collapse in demand for turbines, and in the GE share price.• Automotive. The global auto sector has been forced to do a U turn

towards EV over the last 18 months.

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The energy transition and demand peaks

2005

2007

2011

2014

2021

2030s

2021

EU gas demand

European fossil fuel demand for electricity

Global gas turbine demand

Global coal demand

Global demand for new oil cars

Global fossil fueldemand for electricity

2022

Global fossil fuel demand total

2020s Global oildemand

Global gasdemandRWE

Peabody

GE

Victims of the peak

VW

Gazprom