Once upon a time energy policy used to be a political backwater. Now it is centre stage for political virtue signalling. Political and business leaders now use climate and energy policy to signal broader values across all colours of the political spectrum.
This commentary is increasingly detached from the practical and functional realities of large energy supply and delivery systems. As it turns out its easy to get away with almost anything when it comes to talking big on energy, because almost no one understand how it works in the first place. Accountability is practically non-existent.
This week The Nationals released their Australian Manufacturing 2035 manifesto, which railed against the long term structural decline in manufacturing in Australia and proposed that this could be turned around by building new coal fired power stations, starting with NSW’s Hunter Valley.
We’ve been here before. The Nationals remain committed to a tiny labour hire business in Collinsville, Queensland, building a $2 billion power station, despite having no experience in energy or large scale project management.
Of course there is nothing genuinely substantial about their 20 page policy essay. State governments have made it clear they will not approve new coal generators because of the long term carbon risk they create. Talking about coal fired power stations is simply to speak to The Nationals political base. To make a public stand against the perceived political correctness of climate change and good old-fashioned, regional Australian common sense.
The latest contribution from The Nationals is just one among many energy based cries for attention. Credit ratings agency Standard and Poors announced they would be putting 13 oil and gas companies on credit watch “under threat from growing climate risk“.
The ratings agency targets include companies like ExxonMobil, Total, Chevron, Shell and Woodside in Australia, although Origin was not included.
The ratings agency said it saw “significant challenges and uncertainties” from the energy transition, including market declines due to the expected growth of renewables and downward pressure on profitability. But S&Ps real credit rating issue with these businesses isn’t about climate change. Its about COVID-19.
Oil prices collapsed as a result of a global pandemic combined with a price war between Russia and Saudi Arabia. Oil prices have a way of stabilising: low prices forced higher cost producers to shut down production, and demand has begun to recover late in 2020. Oil prices have recovered to their pre-pandemic levels while demand for gas skyrocketed during a cold snap this winter.
The real threat to oil markets is fuel switching away from fossil fuels to electrification. Electric vehicles rose last year to around 4 per cent of total car sales, but this is mostly in the luxury car market. EV’s still sell at a big price premium to conventional cars, and this tipping price point is still years away.
Similarly gas demand will remain stable for gas or even grow as it is used to replace supply from closing coal fired generation and work with renewables. The big threat to gas is hydrogen, and that is still in the lab.
Credit ratings agencies shouldn’t be assessing strategic investment risk, they should be assessing the risk that these companies won’t be able to pay back debt over the next 5-10 years. It’s hard to see how climate change poses a debut risk in this time frame.
Credit rating agencies notoriously failed to assess the true risk for subprime mortgage assets resulting in the Global Financial Crisis. They are hyper-vigilant to be on top of the next risk event, a bit too keen to join the populist carbon witch hunt.
In particular, S&P said it sees downward risks to return on capital as a result of the capital investment levels over 2005-2015 period and lower average oil and gas prices since 2014.
Sometimes the best way to cut through is to go really big. At the 2021 Boyer lecture Fortescue Metals boss Twiggy Forrest used the speech to talk about himself, and what he was doing to fight climate change.
Forrest says he wants to build 1000GW of zero emissions electricity generation, focussing on hydro (geographically limited) and geothermal (failed) to produce green hydrogen and then green steel. Fortescue is a major iron ore miner, which gives Forrest about as much expertise in energy and making steel as a forestry company has in running a newspaper.
To give a sense of scale, the National Electricity Market is around 56GW. The biggest electrolyser (which makes hydrogen from green energy) in Australia is 1.25MW (0.00125 GW).
Forrest announced he would start building a hydrogen-based steel mill in the Pilbara in the next few years. Just to build it would truly be an astonishing achievement, to make it remotely cost competitive with conventional steel production would be miraculous.