The UK Chancellor George Osborne needs to stop pushing 20th-century fuels as the solution for 21st-century energy problems.
Nearly a year of low oil prices has been a disaster for drillers of oil and gas in American shale. Their costs of production are mostly far above sales prices, notwithstanding innovative improvements in the cost-efficiency of fracking. They have only been able to keep going because of Wall Street’s willingness to shovel mountains of debt in their direction: nearly a quarter of a trillion dollars of it to to date, mostly junk rated.
Eight drillers have already gone bankrupt and it can be expected many more will not survive the review by banks of credit lines coming up in October. Analysts speak of imminent carnage (WSJ). The US shale boom is heading for bust. There is a whiff of subprime in the spectacle.
On top of this collapsing economic model pile environmental woes. Recent studies suggest worrying rates of methane leakage from US shale operations. The inventor of the monitoring device routinely used by the industry warns that a fault in his invention means historical estimates of leakage are severely understated. Gas may not be better than coal, in greenhouse terms, after all. In the face of this emerging news, the Obama administration has announced a crackdown on methane leakage, and new emissions targets for the power sector fast-tracking renewables ahead of gas.
Meanwhile, the case for nuclear is beset with economic and safety problems. The size of the cheques the chancellor is prepared to write for outsourcing new nuclear to French and now Chinese interests has already landed one court case from Europe on his desk. Austria is aghast at both the inexplicable enormity of the subsidies and the UK retreat from EU renewables targets. With the Paris climate summit looming, it is far from alone. More legal challenges can be expected on the Treasury doormat.
On top of this, a dire safety flaw has emerged in the French reactor that is the intended forerunner of new British nuclear stations. High carbon content discovered in the pressure vessel steel, weakening it beyond regulatory acceptability, is a problem so potent that it poses an existential threat to the project, and potentially to the industry itself. The French have yet to reveal either the cause of the fault or the additional cost to a project already billions over budget and years behind schedule.
Meanwhile, the green industrial revolution continues to unfold fast elsewhere in the world, amid plunging costs. Renewables have provided more new electricity generation capacity globally than fossil fuels and nuclear combined in each of the last two years. Apple plans to be mass producing solar-charged electric vehicles less than five years from now. Goodness knows what information-based energy innovations are in the pipeline at Google. Both companies have invested more than $1bn in renewables to date. Ikea is now selling solar roofs alongside wardrobes.
UBS calculates that within five years homes fully powered by a solar roof, a battery bank, and an electric vehicle will offer consumers a 7% annual rate of return on an investment paying back fully in six to eight years without a subsidy in sight.
Meanwhile, both the nuclear and shale industries openly admit they cannot add to UK electricity supply for at least 10 years, and will require multiple billions in giveaways to have a chance of limping to that point.
To go with this field of icebergs the Treasury has elected to steam through, the governor of the Bank of England this week added another. In a speech and a BBC interview, Mark Carney described climate change as the biggest future threat to economies, concluded that the majority of fossil fuel reserves must be deemed unburnable, and voiced concerns about the risk of stranded assets destabilising markets. It is imperative that investors be provided with information that allows them to “invest accordingly”, he said, clearly meaning that they should stop further inflating the carbon bubble, in order to increase the chances of an orderly retreat from fossil fuels.
This is the first time a regulator has defined climate change as a major financial risk. It shines a whole new light on the irresponsibility of the Treasury’s version of UK energy policy. The obsession with exploiting UK shale is now, by corollary, a threat to the stability of capital markets.
George Osborne needs to stop listening to lobbyists defending dying 20th-century technologies and industries, and start listening to Jeremy Corbyn and Mark Carney.
Categories: Economic Indicators