Today there is an interesting email from Bloomberg Green. It discusses how the cost of c -ital is rising for fossil fuel businesses and falling for renewable energy. The bottom line is, “Markets could end up destroying fossil fuels before governments do.” Why is that? Let’s look at the details behind this rather surprising statement.
The cost of c -ital
I am not an economist, so some of you may find my comments naive, curious, or even completely wrong. In general, when a company like Exxon wants to fumble around the world and drill test holes here and there looking for new oil reserves, it turns to the financial markets to borrow the money it needs to fund those missions.
Investors want to be repaid with interest. How high the interest rates are usually depends on how risky the investment is. The higher the risk, the higher the interest. Tim Quinson, editor-in-chief of Bloomberg, writes in today’s email that the cost of c -ital to develop oil and gas projects and renewable projects were pretty much the same a decade ago – somewhere between 8 and 10%.
Not anymore, he writes. The threshold of the projected rate of return that a new oil project can financially justify is now 20% for long cycle developments, while it has dropped to anywhere between 3% and 5% for renewables. That’s what Michele Della Vigna, an analyst at Goldman Sachs based in London, said.
“This is an extraordinary divergence that is leading to an unprecedented shift in c -ital allocation,” says Della Vigna. “This year will be the first time in history that renewable energies will be the largest area of energy investment.”
Why the change?
The first question most people will ask is why the change? Bloomberg Intelligence analyst Will Hares explains that pressure from ESG investors is the best explanation for the growing difference between dirty and clean. “With rising ESG and sustainability concerns, oil companies are finding it increasingly difficult to raise funding while banks are pressured by their own investors to reduce or eliminate fossil fuel funding,” he says.
This translates into more expensive leverage (double-digit coupons in some cases) which, when coupled with lower stock valuations, means most oil companies face higher costs of c -ital, Hares adds.
The conversation at COP26
Is that a sick joke? -parently there were more fossil fuel lobbyists in Glasgow last week than climate conference delegates from every nation in the world. If that doesn’t make you puke, I don’t know what. These sleazy, grinning flatterers are paid to sabotage climate change talks so that the companies they represent can continue to poison the environment with the waste products produced by burning fossil fuels. They should all be brought before the International Criminal Court and charged with crimes against humanity.
Louis Wilson (@louisjwilsonuk) of @Global_Witness says the number of fossil fuel lobbyists at # COP26 is “greater than the combined delegations from the eight countries hardest hit by the climate crisis”. pic.twitter.com/4Wdlbl4NrW
– democracy now! (@democracynow) November 8, 2021
Future investments in renewable energies
In Glasgow last week, Della Vigna estimated that about $ 56 trillion, or about $ 2 trillion per year, will be invested in renewable energy, bioenergy and other clean energy infrastructure projects through 2050. Spending is expected to peak between 2035 and 2040, driven primarily by spending on power grids, charging networks, building modernizations, and a massive expansion of renewable energy sources such as clean hydrogen.
“It is significant that such a large section of the financial sector has recognized its role in the climate crisis and the need to reduce its financed emissions,” said Ben Cushing, campaign manager at Sierra Club, to Bloomberg. “But to reach net zero by 2050 and stay within 1.5 degrees Celsius of warming means stopping financing the expansion of fossil fuels today. That is the decisive test of whether these obligations correspond to reality. “
Manage the spread
“Against this background, the spread between oil, gas and coal and renewables will widen further as banks change their financing habits,” says Quinson. In other words, as the politicians all crowd around the free shrimp cocktail table in Glasgow, the financial world is doing what it doesn’t want or can’t.
Banks and investment firms are not elected by anyone and are subject only to the almighty dollar. When lending (and insurance) to fossil fuel companies dries up, it will be game over for them. They can lie to Congress, they can pour money into the campaign coffers of crooks like Joe Manchin, they can fund groups like the American Petroleum Institute to their heart’s content, but without access to affordable c -ital they are done for. Complete. Broken.
Numbers don’t lie and the bottom line is the bottom line no matter what any politician or lobbyist says. The cost of c -ital is a key factor in calculating LCOE from any source. When these costs rise, oil, coal, and dirty methane projects look much less attractive. There is an excellent chance the financial sector will put fossil fuels out of business long before our political leaders have the courage to act.
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