“The greener economy view is also rapidly becoming a central plank of liberal proposals for restructuring the U.S. economy as it rebounds”

“We have a unique opportunity to build a greener and more resilient Europe through investment and innovation,” stated Thomas Buberl, Chief Executive Officer of insurance giant AXA and Chair of the new CEO Action Group for the European Green Deal. This view is shaping the debate over the European recovery plan, although there remain skeptics of its sustainability. The greener economy view is also rapidly becoming a central plank of liberal proposals for restructuring the U.S. economy as it rebounds from the Covid-19 shutdown. These pushes for greener economies are prompted by pictures of cleaner air over various cities around the world that appeared in the media as economic shutdowns peaked earlier this year. An interesting aspect of those clean air pictures is that the greenhouse gas data reported by the meteorological station on the Mauna Loa volcano in Hawaii doesn’t show any reduction in CO2 this spring. How could there be so much clean air in cities that locked down their citizenry, restricting the amount of driving undertaken, yet no impact on CO2 data? The National Oceanic and Atmospheric Administration (NOAA) who operates the station explained on its web site that the natural carbon cycle was overwhelming the reduction in emissions. Who knew that the world was subject to a seasonal carbon cycle that is strong enough to offset the reduced carbon emissions from a global economic shutdown?

“Who knew that the world was subject to a seasonal carbon cycle that is strong enough to offset the reduced carbon emissions from a global economic shutdown? ”

Covid-19 Not Impacting Carbon Emissions

According to the Organization for Economic Cooperation and Development (OECD), which includes 37 of the world’s most developed economies, the group’s GDP fell by 1.8% in 1Q 2020, the largest quarterly decline since the 2.3% contraction experienced in early 2009 at the height of the financial crisis. What we know is that country shutdowns created greater economic retrenchment in the early months of 2Q 2020. The International Monetary Fund (IMF) was projecting a 3.0% decline in world GDP this year, after originally forecasting growth of 3.3%, a swing of 630 basis points. Last week, the World Bank issued a report predicting the global economy could shrink by 5.2% this year, a severe contraction, but not the worst forecast scenario the bank presented. The 2020 contraction makes the Great Lockdown, as the IMF calls it, greater than what was experienced during the 2008-2009 Financial Crisis, and only surpassed by the 1929-1932 Great Depression era when global GDP shrank 50%.

“Last week, the World Bank issued a report predicting the global economy could shrink by 5.2% this year, a severe contraction, but not the worst forecast scenario the bank presented”

We found NOAA’s explanation for the lack of carbon emissions progress to be fascinating since seldom is there any mention of the existence of a natural carbon emission cycle, nor that it is significant.

What we are learning with the sharp global economic contraction is just how strong nature truly is. Regardless of the recent data, the Global Carbon Project, a global research project of Future Earth and the World Climate Research Program, both groups of scientists and climate experts from around the world, using data from the International Energy Agency (IEA) and the Carbon Dioxide Information Analysis Center (CDIAC), forecasts a 5% reduction in CO2 emissions this year due to the economic shutdown. The group notes this will be the first emissions reduction since CO2 fell 1.4% following the 2008-2009 Financial Crisis. We would point out that there has been a decline in emissions after every significant economic event, as demonstrated by the chart in Exhibit 20.

“The group notes this will be the first emissions reduction since CO2 fell 1.4% following the 2008-2009 Financial Crisis”

Significant CO2 Reduction Predicted For 2020

The hope is that 2020’s CO2 decline will set the world on a new trajectory that will bring it closer to the goals of the 2015 Paris Accord. Governments now are able to unleash the monetary printing presses with the blessings of their citizens who are pleading for financial support to deal with the Covid-19 shutdowns. At the same time, expectations are that interest rates will remain near zero for the foreseeable future, a policy embraced by the U.S. Federal Reserve, minimizing the financial pain governments will face as they increase their spending and grow their debt. With this framework in mind, we see, especially in Europe, concrete plans to target industries perceived to be catalysts for building a green economy and back them with policies and money.

“France is taking a leadership role in Europe in this green economy effort”

France is taking a leadership role in Europe in this green economy effort. President Emmanuel Macron announced an €8 ($9.1) billion plan to revive France’s automobile industry. The plan increases by €1,000 ($1,136) the subsidies for buyers of electric and hybrid vehicles, increasing them to €7,000 ($7,953). There will also be funds for research into hydrogen power and self-driving cars. France will also have the equivalent of the U.S. “cash for clunkers” program from the Financial Crisis days, in that French car buyers can purchase conventional gasoline- and diesel-powered vehicles if they can demonstrate these new cars are more fuel-efficient than their current vehicles.

“He wants France to lead Europe in the production of clean vehicles, with an output target of one million units a year by 2025”

A prime motivation for France’s financial stimulus programs is to not only promote greater economic activity, but also to drive it towards greener energy. In President Macron’s targeting of near-term support for France’s automobile manufacturers and its suppliers is the hope they will become global manufacturers and exporters of clean vehicles. He wants France to lead Europe in the production of clean vehicles, with an output target of one million units a year by 2025. PSA, owner of the Peugeot and Citroën brands, is increasing its clean car manufacturing capacity from zero in 2019 to 450,000 annually by 2022. Renault, another French car manufacturer, plans to triple its clean car output by then.

President Macron has pitched his rescue efforts, including those for Renault, as a three-way deal between the state, manufacturers and employees. The companies should be investing in production on French soil, as a condition of receiving government support. One shouldn’t underestimate the role that the French government’s ownership of 15% of Renault has played in the rescue effort.

“The companies should be investing in production on French soil, as a condition of receiving government support”

To further that effort, France and Germany have teamed up to back a consortium of PSA Group, its German subsidiary, Opel, and Total’s Saft, to build an electric vehicle (EV) battery manufacturing plant, freeing the European auto industry from dependence on China and South Korea for EV batteries. France’s Renault will become a partner in the consortium, also. The two governments are pledging €1.7 ($1.9) billion to support the consortium.

The €7 ($8) billion bailouts of Air France-KLM and Air France requires various greenhouse gas reduction steps. The airline is to cut by 50% its overall CO2 emissions per passenger-mile by 2030, compared to 2005 levels. For domestic flights, the reduction is more stringent, as Air France is to cut emissions by 50% by 2024. One way this will be accomplished is to stop flying between domestic cities where high-speed rail transportation of less than 2 ½ hours exists. French finance minister Bruno Le Maire said that these short-distance flights “aren’t justified.” As he put it, “The cost in terms of carbon emissions is too high.” Short-distance flights for feeding passengers onto long-haul flights will be allowed, but at a much-reduced level.

“One way this will be accomplished is to stop flying between domestic cities where high-speed rail transportation of less than 2 ½ hours exists”

France is not the only European government targeting green investments as part of structuring its financial stimulus efforts to help their Covid-19 ravished economies recover. These efforts will impact the future of the energy business – both for transportation and electricity. The social embrace of many of these actions across Europe, whether it involves clean vehicles, renewable-powered electricity generation or restrictions on the use of vehicles within urban areas, carries a cost, which has yet to be fully-levied on the citizens. In Germany, the revamping of its electricity industry to generate 65% of its power from renewables has led to protests about the relative burdens levied on residential and commercial power-users. There is also a growing battle over wind turbine siting, an issue so contentious it may cripple the onshore wind industry.

“There is also a growing battle over wind turbine siting, an issue so contentious it may cripple the onshore wind industry”

Amazingly, Germany has recently started up its last coal-fired power plant, something fossil fuel supporters point to as a necessary evil due to the country’s move to a largely-renewable electricity system. The 1,100-MW Datteln 4 €1.5 ($1.7) billion power plant in the North Rhine-Westphalia region began testing in May and went into commercial operation on May 30. Its supporters acknowledge the timing of the start-up was unfortunate. During the testing, Germany’s power demand was so low due to Covid-19 that overall power prices fell to such low levels renewable energy producers lost money. This has prompted a call to increase and extend the subsidies for renewable power.

The new Datteln 4 plant is much more efficient, allowing the closing of older, less-efficient plants, which could cut 40% from the industry’s carbon footprint. The challenge facing Germany’s power industry is how to fuel its electricity generation while meeting the country’s goal of becoming carbon neutral by 2050. German citizens found out the answer to a question posed by The New York Times: How hard is it to quit coal? The answer was 18 years and €40 ($45.5) billion. That investment will fund the closure of the nation’s 84 coal-fired power plants by 2038 and the social costs for the displaced workers.

“The answer was 18 years and €40 ($45.5) billion”

An argument for closing the coal-fired power plants is the job creation that comes with renewables. According to government data, there are about 20,000 workers in Germany’s lignite (brown) coal industry, and about 15,000 in its black coal mining industry, with about 5,000 workers at lignite-fueled power plants. That compares to more than 250,000 renewable energy sector workers. (There is always a question about how green energy jobs are counted, and the methodology often overcounts them.) Of course, the goal of power is to reduce the number of workers necessary to produce it, allowing others to work in more economically-productive jobs. That has been its history, too. At the height of Germany’s coal industry in 1957, it produced 150 million tons of black coal and employed 607,000 workers. Although output has declined, a significant portion of the reduced labor is due to improved mining productivity.

“The goal of power is to reduce the number of workers necessary to produce it, allowing others to work in more economically-productive jobs”

Lower Saxony’s government, Germany's largest wind producing state, is calling for a "safety net" in the form of continued support payments for wind turbines, targeting those who lose their subsidies in 2021. That marks the end of their 20-year guaranteed support period. These turbines cannot be easily replaced. Thus, Germany would face a decline in its total renewable power capacity. A reason they cannot be easily replaced is that there is growing opposition to the siting of turbines, resulting in litigation and regulation against new turbines. The government says "This safety net should be akin to long-term power provision contracts." It proposes a fixed remuneration of about 4.4 eurocents (5-cents) per kilowatt hour (kWh) for a maximum of seven years. It argues that power customers, who pay the surcharge with their power bill, would not face higher costs as long as power prices for onshore wind remain above the fixed remuneration.

“It proposes a fixed remuneration of about 4.4 eurocents (5-cents) per kilowatt hour (kWh) for a maximum of seven years”

Some of the power providers argue that they need a “temporary backstop” to avoid a decrease in Germany’s renewable power capacity. Five thousand onshore wind farms are targeted to close. Power companies believe it is cheaper to keep old, fully-functional wind turbines operating than to replace them with power plants of any technology.

Covid-19 Hit German Energy Use Hard

“Wind power was the largest component with about a 35% market share”

A concern for keeping wind turbines spinning was their contribution to Germany’s energy mix during 1Q 2020. During that quarter, renewable energy accounted for more than half the electricity generated on the German grid for the first time ever. Wind power was the largest component with about a 35% market share.

“For politicians and managers, short-term concrete economic pressures may far outweigh long-term possible health issues”

The impact of the global economic shutdown on electricity use has been significant, although it varies by country. In a recent report, the IEA showed just how power demand fell with the start of shutdowns, and in the early stages of recovery. As power demand grows, how it is fueled may shift based on employment and economic considerations, overwhelming environmental concerns. For politicians and managers, short-term concrete economic pressures may far outweigh long-term possible health issues.

Covid-19 Impact On Electricity Use

For example, in India, the government is seeking to bail out power generation and distribution companies while pushing utilities to switch to using coal from the country’s ever-growing stockpiles. That may help the economics of the companies, while at the same time boost employment in the coal mining industry.

“The abandonment of coal investments by sovereign wealth funds and large, socially-focused institutional investors will also add to the challenging investment environment”

Other countries such as Bangladesh, Mongolia and Indonesia are backing building more coal-powered plants. Financing these projects may become more challenging as various banks, largely those in Europe, are backing away from financing coal projects by 2030 and 2040. The abandonment of coal investments by sovereign wealth funds and large, socially-focused institutional investors will also add to the challenging investment environment. For example, the Norwegian sovereign wealth fund has dumped the stocks of five coal companies and put four others on notice. A major French bank has also announced it will cease financing all coal projects for European Union and OECD countries by 2030 and the rest of the world by 2040. The World Bank announced in 2013 that it would only finance coal projects if there were no alternative energy source available. Since then, the bank has worked around this pledge by making indirect loans, but again only in countries where there are limited alternatives.

“The IEA projected coal use through 2023 would be stable”

In December, the IEA projected coal use through 2023 would be stable. It sees strong consumption growth in Southeast Asia offsetting declining consumption in Europe and North America. The reason for Southeast Asia growth is its affordability and availability, according to the report. CarbonTracker’s web site has an interactive chart showing global coal use. Based on 2019 data, the world has 2,044,831 meagawatts (MW) of coal power generation capacity. China accounts for 49% of that total. In the United States, coal generating capacity was 246,187 MW, which was slightly higher than third-place India with 228,964 MW. The big difference is that the trend in the U.S. is down, while it is rising in India.

China’s Coal Use Has Soared

While China is the world’s largest coal consumer, it is continuing to add plants as the country’s power needs grow. At the same time, China continues to build out its renewable energy portfolio and, importantly, the ability to get this power to market. In the past, much was made of China’s additions of renewable generating capacity, but its output wasn’t growing at a commensurate rate. That was because there were limits on the capacity to ship this power to customers. China recently completed the construction of a $3.17 billion ultra-high voltage electricity line that, for the first time, will transport only clean energy. It will allow more renewables to be developed in Qinghai and Gansu provinces and deliver that electricity to Henan in central China. Based on initial plans for 2020, China planned to add 52% more new wind and solar power capacity than it did in 2019. That year it added 25.74 gigawatts (GW) of wind power and 30.11 GWs of solar, but it still has capacity to add 36.65 GWs of wind and 48.45 GWs of solar power to the grid.

“China recently completed the construction of a $3.17 billion ultra-high voltage electricity line that, for the first time, will transport only clean energy”

China’s Energy Mix Is Changing Slowly

“Michael O’Leary of Ryanair commented, “I suspect an awful lot of the environmental agenda and targets will be put on the backburner for a number of years” ”

Covid-19 and its response has upset the global energy market. In most regions, the higher cost of renewables compared to indigenous coal deposits has led to the latter being favored for fueling additions to electricity generating capacity. In the region most committed to green energy, Europe, the financial stimulus is being used to reorient its carbon emissions trend. In Europe, this effort for more green energy is not being embraced by all parties. The commentary by one leading European businessman offers a view as to the future. Michael O’Leary of Ryanair commented, “I suspect an awful lot of the environmental agenda and targets will be put on the backburner for a number of years.” He went on to say that people will still care about the environment, but they will care more about “massive unemployment” and sizeable government indebtedness. As a columnist for the Financial Times put it, Mr. O’Leary has history on his side. Ahead of the global recession associated with the Financial Crisis, he predicted the downturn would shift attention from the environment to unemployment, which is exactly what happened. Mark Carney, the former Bank of England governor, confirmed that shift when he pointed out that immediately following the recession, only $1 in $6 of investment was spent on sustainable infrastructure.

The FT columnist said she thought that Mr. O’Leary would be wrong about this crisis. In her view, too much has changed over the past decade. Green technology is cheaper, it employs massive numbers of people, and countries have agreed to compensate coal workers and other workers who lose their jobs in the green energy shift. All of that makes it harder to argue that climate change actions will automatically cost jobs. Left out in this analysis: At what cost?

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Energy Musings

Rebuilding Economies After Covid-19 And Fuel Choices