Tag Archives: energy
Drax First Half Earnings Down Amid Heavy Biomass Investment
30 July 2013 Drax: continued invetment in biomass Drax Power’s earnings have fallen in line with expectations as it continued to invest heavily in biomass and carbon costs ramped up in the first half of 2013. The coal generator on Tuesday reported underlying earnings of £120 million in the six months ending 30 June 2013, down 22 per cent on the previous year. It invested £138 million in its capital programme, including £106 million in biomass. The first of three units to be switched from coal to run on biomass went live in April and is said to be performing to plan. Dorothy Thompson, chief executive of Drax, said: “We are investing significant capital this year and next to transform our business, with earnings during this period impacted by the increasing costs of carbon. However, as we move beyond this investment phase and replace substantial quantities of coal with sustainable biomass, we are confident that we will deliver attractive returns for our shareholders.” The company is considering whether it is attractive to convert further units with support from the contracts for difference being brought in through the government’s Energy Bill, she added. It is also looking at the opportunity for its coal generation to participate in the planned capacity market. The converted biomass unit has proven able to generate 585MW, around 10 per cent less than each coal burner. It has been available 76 per cent of the time since it started, which the company is confident will rise to 80 per cent on average for 2013. The load factor was lower, at 57 per cent, attributed to temporary fuel constraints. Drax is also investing to build up the biomass supply chain and construction has started at US pellet plants to prepare fuel for import to the UK. Haven Power, the company’s retail arm, is expanding. It increased sales 67 per cent to £323 million, or 3.7TWh, winning big customers including Muller and Santander. Drax aims to sell 12-15TWh through Haven in 2015. Source: Utility Week Continue reading
Permits To Pollute Can Be Bought Too Cheaply
Cheap emissions permits means industry hasn’t traded in its polluting ways. David Davies/PA When the carbon price collapsed to below €3 in April this year, EU policymakers sought to prop up carbon prices by a deal that would delay the release of carbon allowances (known as “backloading”). This deal was agreed by the European Parliament in July , but has had little impact – prices still languish at around €4-5, well below the highs of €30, the sort of level economists consider necessary to bring emissions under control. Is this a disaster? Does it mean the death of the carbon markets , as many have suggested ? A recent op-ed in the Financial Times made the case that prices do not matter much. The emissions trading scheme (ETS) simply ensures that Europe meets its emissions targets. A low carbon price is not necessarily a sign of trouble. In fact, if – it’s a big if – it’s the result of substantial, sustainable emissions reductions, a low price is a sign of success. But is the point of the ETS simply to ensure that a short-term cap is met? And if so, can the ETS be considered to be a success? Let’s look at the second question first – is the EU ETS making a major contribution to reducing short-term emissions at very low cost? Certainly, emissions are declining in Europe. The official numbers show that between 2005 and 2010, industries covered by the EU ETS cut their emissions by roughly 8% . The ETS is doing its job, one might conclude at first glance. However, those regulated by the ETS are, it turns out, no different to other polluters. Over the same period, total carbon emissions in the 27 EU member states fell by just over 8% , which implies there is little difference between those industries regulated by the ETS and those that are not. Two preliminary studies ( Jaraite and Di Maria, 2011 and Calel, 2013, forthcoming ) directly compare them, and neither uncovers any systematic difference. If the EU ETS isn’t doing the bulk of the work, what is driving the fall in emissions? Most studies (see, for instance, Anderson and Di Maria, 2011 ; Cooper, 2010 ; Kettner et al., 2011 ; Bloomberg New Energy Finance, 2009 ) suggest that the lion’s share of cuts has been driven by other factors such as the EU’s energy efficiency and renewables targets, the recession, and the high price of oil. The ETS has an impact too, but it cannot take credit for the majority of the cuts that have been achieved. Let’s now return to the first question – what is the point of the EU ETS? Certainly, a major objective is to ensure that a short-term cap is met. But another is to set the direction for the economic transition to a cleaner economy. What really matters is the total emissions produced up to 2050, not just those in the short term. And what matters greatly for the health of our economies is that this transition is undertaken gradually and smoothly. We don’t want to move too fast to begin with, but if we dawdle and move too slowly then a late rush to catch up and consequent upheavals will cost economies dearly. A carbon price of under €5 indicates that the system is sluggish – especially when such low prices can be seen to be the result of recession and financial crisis, not a miraculous decarbonisation of our economies. Even at these low prices, has the EU ETS sent a signal to businesses that the development of new low-carbon technologies is likely to yield profits in future? Encouraging evidence from some recent studies suggests that, though few in number, some businesses have invested more in R&D and patented more low carbon technologies. This innovation response seems strongest among those businesses that foresee the future will bring a high carbon price. So while the ETS is not the main driver of low carbon innovation – nor should it be – even in its current state it has encouraged some low carbon innovation. But instrumental to even this modest success, it seems, is that policymakers follow through on the promise that the trading scheme deliver a higher carbon price in the future. Where does that leave us? Should we worry about low carbon prices? Yes – the rock bottom carbon price is not a sign of success. It simply reflects a glut of permits on the market at a time of low economic activity – permits too numerous and cheap to force businesses to invest in innovative means to cut emissions. Low prices matter because they dampen the signal that low-carbon innovation will pay. The EU Parliament’s backloading measure does not directly address this, but it buys time for policymakers to cancel carbon allowances which would restore prices to higher levels. A higher carbon price would get the message to businesses that investment in decarbonisation is money well spent for the long term. When at last zero carbon technologies become economically competitive, we can celebrate the collapse of the carbon price. But that is likely to be some time into the future. Continue reading
This Gamble On Carbon And The Climate Could Trigger A New Financial Crisis
There is little evidence that institutional investors have recognised that they are sitting on a carbon-asset timebomb Kevin Watkins theguardian.com , Friday 2 August 2013 Summer 2013: eastern Europe is facing one of the heaviest floodings in the last 50 years (Photograph: Ruben Neugebauer/Corbis If you want to see market irrationality in action, look no further than current stock market valuations for the world’s major oil, gas and coal companies. At a time when governments are supposedly preparing for a global climate change deal that will cut carbon emissions , energy multinationals are investing in carbon assets like there’s no tomorrow. Put bluntly, either we’re heading for a climate catastrophe, or the carbon asset bubble will go the way of sub-prime mortgage stock. Yesterday’s disappointing second-quarter results for Royal Dutch Shell provided a useful guide to the future. Over the past couple of years the company has invested heavily in exploration. It has pumped billions of pounds into fracking for natural gas in Ukraine and Turkey; the development of tar sands in Canada, and drilling in the Arctic. The market verdict, prompted by a dip in prices, reduced profits, and concern over costs: a drop in share prices. You can’t help wondering what will happen when carbon prices are aligned with climate imperatives. We are now just two years away from the crucial 2015 UN climate negotiations. If successful, they will put a price on carbon, driving down returns on fossil-fuel investments by capping carbon emissions. Market reactions will make Shell’s results look positively healthy. Yet there is little evidence that institutional investors have recognised that they are sitting on a carbon asset timebomb. You don’t have to dig too hard to find the gap between market valuation and real world ecology. Avoiding dangerous climate change, defined as a temperature rise of 2C, will require the global community to operate within a constrained carbon budget. That budget has a ceiling of 545 gigatons in carbon dioxide (GTCO2) emissions to 2050. Today, state energy firms and private companies are sitting on reserves amounting to three times that level. Carbon arithmetic points in only one direction. If governments are serious about reaching a 2015 multilateral agreement that avoids dangerous climate change, fossil fuel reserves need to left where they are. The Grantham Research Institute on Climate Change at the London School of Economics estimates that only 20-40% of oil, gas and coal reserves held by the 200 largest energy companies can be exploited if we are to avoid dangerous climate change. Yet the market valuation of these “unburnable carbon” reserves is over $4tn, to which can be added $1.5tn in company debt. The misalignment between our planet’s ecological boundaries and energy markets is set to worsen. High energy prices and concerns over power shortages in emerging markets are fuelling a global scramble for carbon assets. Collectively, the 200 largest energy companies invested $674bn (£441.4m) on the development of new fossil fuel reserves in 2012. If financial markets are mispricing risk, governments around the world have yet to recognise some basic cost-benefits realities. Companies investing in Arctic oil and gas exploration stand to gain revenue streams that will be counted in billions of dollars. But as highlighted in a recent Cambridge University study, the rapid melting of Arctic sea ice and permafrost threatens to unlock methane emissions that will generate costs of up to $60tn, much of it associated with the impact of floods, droughts and storms in developing countries. In effect these companies are taking what they see as a one-way bet on governments failing to tackle climate change. It’s a dangerous play. If governments fail to act on their climate change commitments, financial exposure to fossil fuel assets could become a systemically destabilising liability. Five of the 10 top companies listed on London’s FTSE 100, accounting for a quarter of the indexes’ capitalisation, are almost exclusively high carbon. The Australian Securities Exchange has a recklessly high exposure to coal. The New York exchange is also sitting on a large carbon bubble. Energy companies are exposing institutional investors, mutual funds and banks to dangerously mispriced assets, yet current regulatory frameworks are failing to address the systemic threat. Unfortunately, governments are actively encouraging energy companies to bet on dangerous climate change. The European Union has driven the world’s largest carbon market into freefall by oversupplying permits, undercutting incentives for investment in renewable energy in the process. As a group, rich countries spend over $800bn annually actively subsiding fossil fuels , creating markets for oil, gas and coal companies. Britain’s recent decision to grant tax concessions to companies involved in fracking is a recent example of a wider failure to align fiscal policy with climate commitments. For every $1 invested in renewable energy support in the OECD another $7 is spent on carbon-intensive fuels. From a climate change perspective, this is the policy equivalent of a government running an antismoking campaign while removing the tax on tobacco and subsidising cigarette consumption. Developing countries are also trapped in a cycle of policy-induced carbon-intensive growth. Currently, they are spending over $1tn annually to subsidise fossil fuel use, according to the IMF. These transfers often dwarf budgets for health and education. As research at the Overseas Development Institute has highlighted, most of the benefits go to industry, large-scale agriculture and middle-class consumers. Eliminating subsidies for fossil fuels could open the door to a win-win scenario. It would cut energy-related CO2 emissions by 13%, slowing the drift towards the dangerous climate-change cliff. Coupled with signals to indicate that carbon prices will rise and early investment in renewables, it would unlock the private investment and spur the technological breakthroughs needed to drive a low-carbon transition. Diverting fossil fuel subsidies into low-carbon energy cooperation would also generate wider benefits. Developing countries such as India and China are already investing heavily in wind and solar power. But if emerging markets are to break their dangerous addiction to coal and other fossil fuels, they need financial support to phase out their carbon-intensive stock. Providing that support through the reallocation of fossil fuel subsidies would help create markets for low-carbon investors – and it would go a long way towards building trust in international climate negotiations that are too important to fail. •Kevin Watkins is executive director of the Overseas Development Institute, a UK development think tank. Continue reading
