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:
Australia’s ERF auction results underwhelm
Australia’s Emission Reduction Fund (ERF) announced the results of its first auction with the average clearing price for carbon set at $13.95. Deforestation avoidance and landfill gas projects dominated the first round of projects. If you have not done so already, we recommend you read Peter Christoff’s op-ed piece in The Conversation, which does a good job at analysing the result.
Overall, we were equally underwhelmed as Professor Christoff. Australia is truly being left behind on emissions reduction as more nations gear up for earnest talks in Paris in December. With many nations indicating that they will come to the talks with double-digit reduction targets as an opening position, Australia’s mere 5% cut looks woefully inadequate.
US Congress under Republican control seeing policy shift to the right, sort of
While it was a foregone conclusion that a Republican-controlled Congress would see a policy shift to the right, the impact on energy policy in reality is more nuanced. On the one hand, we have seen the Environmental Protection Agency (EPA) on numerous occasions recently soften their stance on its forthcoming carbon rules. Also, the just introduced and poignantly named “PTC Elimination Act” by Republican Representatives is a sign of this shift to the right.
However, with the cost of renewables falling, pollution regulations like MATS coming into force, and attitudes trending towards emissions reduction intensity well entrained, Republican control is not as bad as it seems. Just reintroduced with bipartisan support, the “MLP Parity Act” seeks to give renewables the same tax advantage afforded certain non-renewable energy assets. Likewise North Carolina’s Republican Governor extended the state’s tax credit for renewable energy another year. This growing bipartisan support for lowering emissions has even extended into Canada where Prime Minister Stephen Harper has consistently muzzled progressive environmental policy. At the provincial levels, 11 of the 13 provinces and territories signed a statement to accelerate efforts to cut greenhouse gases in protest to the inaction taken by Harper’s government. Overall we conclude that despite dramatic changes in government, a constant push to lower emissions intensity endures.
NextGen biofuels get short-changed but the MSR gets its early start
This month saw two key pieces of EU energy policy near final resolution. The EU Parliament Environment Committee backed a compromise on biofuel legislation. Specifically, the cap on crop-based biofuels will be set at 70% of total biofuels, which are mandated to be 10% of all transport fuels by 2020. Crop-based biofuels already represent 50% which indicates further growth in this sector will be limited.
Leaving only 30% for second and third generation biofuels is disappointing given the recent success seen with cellulosic biofuel in the US. Both the POET-DSM joint venture and Abengoa have recently commissioned multi-million-gallon facilities using waste residue from the agriculture sector. Secondly, the fix for the EU’s emission trading scheme (ETS) called the Market Stability Reserve (MSR) has won support for a 2019 start date. Originally targeted for a 2021 start date, at one-point negotiations pointed to an even earlier start in 2017. The early start should be supportive for carbon prices in the ETS with analysts predicting a €15 price by 2019. Carbon is currently trading at approximately €7.50 per tonne.
China astounds again with wind. Japan low-balls renewables future contribution
Following last month’s gigantic 2015 solar target announcement by China, they have come out again lifting their 2020 wind target from 200 gigawatts to 250 gigawatts. For context, China has 115 gigawatts of wind already installed which represents about 31% of global capacity and they achieved this essentially in just 10 years.
Japan released its much-anticipated energy mix policy that will see a revival of nuclear but to a smaller extent than before the Great East Japan Earthquake. In its place, natural gas, coal and renewables have increased their share. Before the earthquake, nuclear was expected to represent 53% of electricity generation by 2030. It is now targeted only to achieve 22%. Natural gas and coal saw the biggest increases with renewables only receiving modest attention.
The key figure in the policy statement was always going to be the role of nuclear given how divisive it has become for the nation. We suspect the role of renewables, and solar specifically, will surprise on the upside given that the projected cost of large-scale solar used in the policy mix assumes a 2030 cost above what is already being achieved in Germany. Recall that Germany held its first market-based auction for large-scale solar this month and that it has lower solar irradiation than Japan. Despite this, in US dollars, the German price was $0.1040 per kilowatt hour while Japan has a projected a cost of between $0.1063 to $0.1297.
Available for comment:
Nathan Lim CFA
Portfolio Manager
Australian Ethical Investment
(02) 8276 6271 0400 300 819
nlim@australianethical.com.au
www.australianethical.com.au