From Oil to Solar: The Clean Energy Transition is Here
The historic transition to a clean energy economy has begun. Fossil fuel stocks are rapidly losing value as oil prices plunge and capital investment in new upstream supply dries up. Meanwhile, 2015 will be remembered as the pivotal moment when climate momentum became unstoppable. More dollars were invested and capacity added in renewable energy in 2015 than any year prior. A global climate agreement was reached in Paris. A heavyweight investor coalition was announced to finance next-generation clean technologies. The world’s most respected financiers are moving forward rapidly to develop new climate risk disclosure standards for public corporations. And many large global companies pledged to be fully powered by renewables.
Let’s look at some of the most relevant climate- and renewable energy-related trends that investors and businesses should be proactively considering when making strategic and financial decisions.
Stock Market and Oil Prices Are Down
Stock markets are down and fossil fuels are taking much of the blame. Crude is nearing a 12-year low, dropping 75% in the last 18 months, as the market prepares for an influx of Iranian oil exports after international sanctions are lifted. Coal and natural gas prices have followed, hitting their lowest lows in a decade over the past year and a half, already pushing some producers into bankruptcy.
As prices have tumbled, so too have investments. When oil prices were upwards of $100 per barrel, high-risk oil exploration in locations such as the Arctic, western Africa and off the coast of Brazil were tempting. But with falling prices companies have instead cut jobs, curbed capital spending and delayed $318 billion worth of investment into upstream projects, according to an analysis by industry consultant Wood Mackenzie Ltd released last month. In the U.S., spending on fixed assets in the oil industry has decreased by 50% from its peak.
Stock indices have taken note of the increasing challenges facing fossil fuel companies and the accompanying rising interest in carbon risk, creating new indices to enable investors to analyze the relative performance of carbon-intensive stocks. The S&P/TSX 60 Fossil Fuel Free Index and the S&P/TSX 60 Carbon Efficient Select Index both outperformed the baseline S&P TSX 60 Index by over 13% over the past year.
Renewable Energy is Booming
Meanwhile, renewable energy is surging. A new report released by Bloomberg New Energy Finance (BNEF) shows that last year was a record-breaking year for renewables, with more money invested ($329 billion) and more capacity added (121 GW) in 2015 than in any other year. With the U.S. government announcing that it would extend tax credits for wind and solar power for another five years, leading to an estimated $73 billion more in investment and an additional 39 gigawatts of capacity, the trend towards increasing renewables is clear. Continuously falling prices for photovoltaics and wind turbines lead experts to project that renewables will dominate fossil fuels by 2030, adding four times the power capacity that fossil fuels will. In some places solar-powered electricity is already being offered at incredibly low costs, surpassing even natural gas as the most competitive option. Last year Warren Buffet’s NV Energy Inc. purchased electricity from SunPower Corp. and First Solar for 4.6 kWh and 3.87 cents per kWh—some of the cheapest energy prices in the U.S.
It’s not just developed countries that are rapidly moving to install renewables. For the first time, half of all annual clean energy investments came from emerging markets in 2015. In 2015, China increased its investment by 17%, spending a total of $111 billion on clean energy infrastructure—almost as much as the U.S. and E.U.’s total investments combined. India is also emerging as a major player, where funding for clean energy rose 23% to $10.9 billion and plans to add 175 gigawatts of clean power by 2022 were announced. Other top markets for attracting capital for clean energy projects attracted tens of billions of dollars in investments, including Mexico ($4.2 billion, up 114%), Chile ($3.5 billion, up 157%), South Africa ($4.5 billion, up 329%) and Morocco ($2 billion, up from almost zero in 2014).
Investors and Corporations are Beginning to Take the Lead
To aid in this shift, some of the world’s largest economies and top investors are committing unprecedented amounts of money to renewables. Goldman Sachs announced plans to invest $150 billion in clean energy projects and technology. The investment bank previously had a target to invest $40 billion in clean energy technologies by 2012, and will now almost quadruple that by 2025. A new investor coalition led by Bill Gates, Mark Zuckerberg, Jeff Bezos, George Soros, Tom Steyer and others was announced. The group, called Breakthrough Energy Coalition, has a mandate of investing in a range of technologies that will help transition the world to a near zero emissions energy future. Although the Coalition has not released an intended investment amount, it will channel its resources to ingenuities already supported by government funding as part of the Mission Innovation initiative, wherein 20 countries and 27 representatives from the private sector will work through a multi-billion dollar clean energy fund to increase research and development investments. With clean energy patents on track for its ninth record-breaking year in a row, there is no shortage of promising technologies for investors to finance.
Major corporations are also taking note of this transformational societal shift. More than 50 world-leading companies have now pledged to source 100% of their electricity from renewable energy, including Google, Adobe, BMW Group and Coca-Cola Enterprises via the global collaborative business initiative RE100. In addition, investors are “desperate” for information related to corporate climate risk, according to Mary Schapiro, former chair of the US Securities and Exchange Commission. The Financial Stability Board (FSB) announced in December that it has established an industry-led disclosure task force to develop voluntary, consistent climate-related financial risk disclosures for use by companies. It will be building upon already-established mandatory disclosure requirements from the Australia Securities Exchange, European Parliament and French Parliament.
A transformation of the energy market may come sooner than many think. Renewable energy is booming. Major institutional investors are demanding answers. Corporations are increasingly embracing a clean energy economy. Political leaders are broadly aligned on the need to take meaningful action.
The question is no longer whether humanity will transition to a low-carbon reality, but rather how long will it take. And regardless of the precise answer – the implications are enormous. Globally prominent investors and businesses are moving rapidly to understand and actively plan for a low-carbon future. Others would be wise to consider doing the same.
Written by Joanna Kyriazis and Adam Shedletzky.
 As of February 8, 2016.