We share views from Christopher Sheeron - The first-ever guest author for C-MACC's most recent ESG and Climate report titled "Does DC Understand Economics – Energy Proposals Suggest No".
Main Points from this report include:
We struggle with both of the charts below, as we see the rate of potential renewable additions as far too optimistic, not because of a lack of capital, but because of a lack of materials and the knock on effect that this could have on capital if project costs increase meaningfully or if timelines extend. The solar expansions planned for Texas for example all require solar modules and there is simply not enough capacity to make these modules and in many cases not enough raw materials. All of these projects are not planned for the same year, but regardless, when you add the Texas plans to plans all over the World, you have an annual rate of addition that the equipment makers will not be able to meet. Today, many of the projects are in the planning and financing stage and the installers have yet to go looking for equipment – when they do, they may have to rethink.
In a media interview earlier this week (more details to follow) we were involved in a discussion about inflation and specifically energy. The discussion covered much more than this, but the chart below is perhaps one of the easier ways of showing where our concern lies, and it ties directly to the behavioral patterns that are emerging concerning climate change and ESG focused investing. As noted in the title of the chart, the likelihood that the linear path from here to net-zero will work is very low, given that we would need global government coordination now, and we are far from it. The other scenarios are much more likely, at least in the early years, and they call for an increase in emissions, which implies growing demand for fossil fuels and other materials that have a high emissions footprint. If you are an oil or gas producer and you look at the chart you could quickly conclude that while your products are in demand today and likely to be in growing demand for several years, the longer-term outlook is very unclear. This might slow down your investment plans, or at least make you think twice about the shorter lead-time projects – such as on-shore and shale-based. However, it could kill any longer-term offshore/deepwater projects that take many years to bring on stream. Today we see energy investment hesitancy everywhere (see our Chemical Blog), but at the same time, we do not see the global coordination to drive a faster energy transition, assuming we had the materials and the investment dollars to move any faster. The risk that we run out of produced fossil fuels from time to time over the next 3-5 years is very high.