Mark Lewis: Businesses 'underestimating' speed of low-carbon transition

EXCLUSIVE: Businesses seeking to future-proof themselves against the physical and societal impacts of climate change must set aside resources for scenario analysis - and treat the results of this process as real, rather than "hypothetical".

Lewis is widely regarded as one of the most knowledgable figures in the energy investment space

Lewis is widely regarded as one of the most knowledgable figures in the energy investment space

That is according to BNP Paribas Asset Management’s global head of sustainability research Mark Lewis, who last week published a report detailing how growth in the renewable energy and electric vehicle (EV) sectors is likely to displace oil in the transport space in the coming years.

Entitled “Wells, wires and wheels: Eroci and the tough road ahead for oil”, the report focuses on the amount of energy that can be produced for each unit of capital invested in either oil or renewables. It concludes that diesel remaining cost-competitive in the transport sector, would require the long-term breakeven price to decline to $17-19 per barrel of oil. For petrol to remain competitive, the price would need to fall to just $9-10 per barrel.

These conclusions are based on the assumptions that oil prices will average around $60 per barrel over the next 25 years, while costs associated with wind and solar generation, as well as EV battery production, will fall.

Speaking to edie, Lewis argued that the automotive industry is currently either more aware of these trends or more willing to accept them than the oil and gas sector, where big businesses are continuing to avoid investing large proportions of CAPEX into renewable energy or alternative services.

Lewis pointed out that recent analysis from CDP found that 24 of the world’s largest oil and gas firms had collectively invested just 1.3% of their CAPEX in this manner between January and November 2018, while several of the world’s largest carmakers, including Volkswagen (VW), are now electrifying majority proportions of their portfolios in anticipation of stricter emissions regulations and falling technology costs.

“I’ve been following the impact of renewables on the power sector for a very long time and I’ve seen the disruption they’ve brought to the European utility industry – and it’s clear to me that there is absolutely the same potential for renewables, in tandem with EVs, to wreak havoc on the oil market,”  Lewis, who has researched energy and economics for more than 15 years, explained.

“Oil majors are making decisions today to invest in new projects…where the oil will not start flowing for another five or 10 years, and then, the expected lifetime of the project is another 15-20 years. Over that length of time, you can expect the competitiveness of EVs to increase dramatically and the cost of renewables to fall even further.

“Oil companies should really be looking at shorter timeframes, making lower capital investments into new oil projects and starting to put significant money either into renewables or into shareholder dividends.”

Future-gazing

According to Lewis’s report, the sluggishness of the oil and gas sector’s response partly lies in its sheer scale in comparison to the global renewables market. Oil accounted for 33% of global energy consumption in 2008, compared to just 3% from wind and solar. The largest single use of that oil was in the transport sector, with 55% of all barrels sold being used for road fuel.

But a further contributing factor, Lewis told edie, is the reluctance of oil and gas majors to either invest resources in understanding – or to publicly admit – that renewables are likely to impact energy industries outside of utilities in the short-term. BP, for example, has forecast that global oil demand is likely to continue increasing well into the 2030s, while Lewis claims that the peak will “almost certainly” come within the next six to 11 years.

“Some people, including very sophisticated members of the oil and gas industry, often talk about the energy transition and the risk of stranded assets as if they are hypothetical issues, rather than something which has been disrupting the power sector in Europe for ten years,” he said.

“We’ve already seen hundreds of billions of euros wiped off the market capitalisation of the European utility sector, hundreds of billions of euros worth of assets stranded.”

Through his research, Lewis found that this trend was not exclusive to the oil and gas markets. Like many others in the green economy, he has seen businesses across all major sectors struggling to make the case for electrifying their fleets due to battery costs, range anxiety and a lack of charging infrastructure; or failing to allocate significant resources to projects linking financial outcomes with climate impacts.

In order to help buck the latter of these two trends, Lewis is urging businesses to adopt the recommendations of the Task Force on Climate-Related Disclosures (TCFD), including the completion of scenario analyses for both a 1.5C and a 2C trajectory.

This sentiment is perhaps to be expected, given that Lewis sits on the TCFD himself. But he insisted that the Task Force’s recommendations should be a starting point, rather than a stopping point, in an age of increased awareness around – and pressure to act on – climate change.

“The way that this whole energy transition got going was through governments offering generous subsidies for renewables over the past decade,” he summarised. "Once subsidies are in place, you attract capital; then you start to see economies of scale as manufacturers identify new markets; then costs fall; then governments can put more ambitious targets in place, and the cycle can begin again.

“This process is now being compounded by investors putting more pressure on companies over climate change, and civil society calling on businesses and governments to increase their level of ambition. The feedback loop is, therefore, accelerating and intensifying continually. You’ve got to go beyond your own company and look at the wider dynamics.”

Sarah George



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