Australian Ethical assesses energy policy as part of the investment process for the award winning International Equities Trust. The assessment looks through the lens of primary energy consumption in all regions the Trust seeks to invest. For each type of energy source, the policy is assessed to be either being supportive, neutral or negative with assessments updated continuously.
International Equities Portfolio Manager, Nathan Lim, provides this month’s update:
Renewable energy records keep falling
According to the United Nations Environment Programme, the world increased spending on renewable energy technologies by 17% to a record US$270 billion in 2014 reversing a two-year slide in investment. A total of 103 gigawatts of clean capacity was brought on-line last year, a new record. This bodes well for future investment because Europe reportedly saw investment flat line. The implication is the view that clean energy is a Eurocentric experiment is extremely outdated. Renewable energy and emissions reduction have become a global policy imperative.
Coal assessment downgraded for Europe
The EU reached a deal to start the fix for its carbon market in 2021. While this is a little disappointing that the German lead push to start the program earlier in 2017 will not occur, it does help to address some of the structural issues with the carbon scheme. While the near-term potential for a sharp re-rating in the European carbon price has subsided, we should see a stronger underpinning for it going forward.
Germany might have lost its push for an early start to the carbon fix, but they have turned their attention internally by introducing a carbon levy on lignite and hard coal plants. The levy is a straightforward penalty designed to force the highest emitting sources in the power sector out of the market. This was welcome news to renewable energy generators who face market-based competition from 2017 onwards. Renewable generators have no fuel cost and will avoid the levy which will only go to strengthen their competitive position. Germany is the largest user of coal for electricity generation in Europe and their decision to impose a carbon levy on generators is a key inflection point in our opinion. As such, we have downgraded our assessment for coal policy in Europe to ‘Negative’.
Regulatory impacts will continue regardless of what the US Supreme Court might say
The US Environmental Protection Agency (EPA) issued rules regulating the use of hydraulic fracturing (“fracking”) on Federal land. While we feel more could have been done; a more robust well integrity check and the end to open disposal pits are key positives in the rule. The little scientific research done on unconventional oil and gas development already points to well integrity as a key point of failure in production. More robust checks and remediation steps are just plain sensible. The ban on open pit disposals is equally sensible as this prevents contaminated water from escaping during flash floods or invisibly through the bottom of a deep hole.
The US Supreme Court has also thrown some doubt behind the EPA’s Mercury and Air Toxics Standards (MATS) during opening arguments despite utilities needing to be in compliance starting in 2015. Recall the MATS rule requires power stations to capture more mercury from their exhaust which principally impacts coal-fired power stations. If the Supreme Court does overturn the MATS regulation, we support the view this will do little to stem the closure of coal power stations across the country. The MATS rule has been in development since 1994 and has been well-flagged, meaning operators long ago made the decision to either install the expensive abatement equipment or close once the rules came into force. As the analysts at UBS have pointed out, the decommissioning process for a power station takes time and involves countless parties. Once the process is underway there would be little utilities could do to stop the process at this point.
China to build nearly five Australia’s worth of solar in one year
China stunned the solar markets by signalling a 2015 solar installation target of 17.8 gigawatts. At the end of 2014, China had already installed approximately 30 gigawatts in total. Even though the world is approaching 200 gigawatts of total installed capacity, such a large target for a single country is still breathtaking. When this solar target is considered next to China’s latest policy decision to close the remaining four coal-fired power stations around Beijing, it is clear the continued growth of renewables has strong underpinnings in this country.
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 6201 1971
0400 300 819
nlim@australianethical.com.au