Returns on Divestments?

NOTE: Images in this archived article have been removed.

Editor’s note: In the this final edition of the interview transcript we cover Chris Nelder’s thoughts on the fossil fuel divestment movement and ideas for investments to catalyze energy transition.

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Justin: Is there a way to catalyze… this energy transition movement? Do you see a way to… divest ourselves from fossil fuels and move this energy transition [along] more quickly?

 

Chris: Divesting from fossil fuel producers is a little like trying to step on the brake of a runaway car. You might slow it down a little, but you’re not going to stop it and eventually the breaks are going to burn out anyway. You’re just going to continue hurtling down the hill. I don’t think there’s any way to actually deprive the fossil fuel industry of 100% of its funding.

 

Universities can step out, the pension funds can step out but what happens next? Well banks and hedge funds [will] step in. I don’t think the divestment strategy to get out of fossil fuels is actually the right way to go about catalyzing energy transitions. It is a political tool and it is useful for organizing public pressure. For people who are [focused on] organizing people, divestment is a great strategy, but I don’t think it is a way to catalyze energy transition, that’s not the way the global economy works. The global economy works on fossil fuels and especially oil. Oil is the transportation fuel of the world. We can’t do much of anything without it today. Hopefully in the future we can but, right now we can’t. If we want to catalyse energy transition then I think we ought to do it directly by investing in energy efficiency, investing in renewable energy production and grid development so that we can do things to accommodate higher percentages of renewable power on the grid, and especially in transportation transition.

 

The very best way that we can get off the needle of oil is to stop driving cars and trucks and switch to rail. That is absolutely the biggest possible way that we can reduce our oil consumption. That’s the first thing. I feel the same thing about climate change. We ought to focus on what fuel we put into the engine of the world economy, not just try to stuff up its tail pipe. That’s been the carbon emissions strategy has so far; Kyoto and Copenhagen, and so on. If you’re just going to try and stuff up the tail pipe, all you’re going to do is back things up. This creates back pressure, the engine would stop and nobody’s going anywhere. That’s not the way to do it. You have to provide an alternative fuel. I think that focusing on carbon emissions is approaching the problem backwards and I would really have to say the same thing about divestment from fossil fuels. It is not enough to try and clamp down on fossil fuels and hope that the market will suddenly, sort of automatically, switch to renewable energy. We should directly try to switch to renewable fuels first. If we do that, then carbon emissions will be taken care of, and we’ll be sure that we’re going to wind up with a clean economy, not just hope that it works out that way indirectly.

 

Justin: If you were to sit down with somebody who is lobbying their university endowment manager or actually speaking to a university or pension fund endowment manager, what would you say to them and what are some of the new possibilities that are coming along to invest in energy transition?

 

Chris: I would first try to get [a divestment campaigner] to understand the likely trajectories of cost for all the different fuels, what energy transition means for grid power and transportation; to understand things from a long-term perspective. For example, Warren Buffet has been very smart about this for investing in rail and heavily in, big wind and solar farms. I think the story of a carbon bubble is real. There will be a significant chunk of fossil fuel reserves that are currently on the books of producers, both the national and independent companies, that won’t end up being produced. The question is why?

 

I don’t think those fossil fuel reserves will wind up stranded because of carbon policy. It would be nice if the world could suddenly get its act together and put a carbon policy in place so the market could do its thing. [That way] we’d all end up eventually with energy transition. However, I don’t think the history of attempts to form global carbon policy speak very well to that possibility. I don’t think that these fossil fuel reserves are going to be stranded due to divestment either. There will always be other money to replace the money that’s divested. I think that the carbon bubble is real and those fossil fuel reserves on the balance sheets are potentially stranded for two different reasons.

 

First, renewable energy is undercutting coal and natural gas for grid power generation. That’s happening on price alone, and that’s already happening now. That’s what’s happening in Germany, and that’s what’s happening in parts of the US. It is happening all over the world.

 

Second, oil will be stranded as the cost of production finally gets high enough that consumers can’t afford it anymore. The future of oil is a race between improving the efficiency of vehicles and the escalating costs of production, so which will win? If efficiency improves quickly enough, if we could replace a billion inefficient vehicles worldwide with vehicles that are 2–3 times as efficient within the next 20 years then perhaps we could adjust to the rising cost of oil production, and we’d just keep using it. But if the cost of oil production goes up faster than we can adjust to it by replacing vehicles, then we’ll simply be forced out of our cars and most of us will switch to public transportation or other various forms of transportation that don’t require oil: walking, cycling or electric vehicles and hopefully rail.

 

My bet is that it is going to be the latter. I don’t think we can replace enough inefficient vehicles quickly enough to keep up with the escalating costs of oil production. So if I were going to advise a money manager on what to do, I would say reduce your exposure to potentially stranded assets. These investments are not going to be stranded right away, maybe that thesis doesn’t actually take root for another ten years or so, but who cares? If you can get reasonable returns on green bonds, which are invested in renewable energy projects and efficiency projects at basically zero risk, in this environment, then I think you should allocate at least part of portfolio to that.

 

I think that investing in rail makes great sense because the price of oil is only going to get higher in the future, at least until it hits the pain tolerance limit of consumers. Rail will always be a highly efficient way to move people and freight around. I would advise a careful look at some of the creative financing that’s happening right now for energy retrofits. There are some really creative people out there who are figuring out how to replace all the street lights in a city and actually cut the city a check for $40 million when they sign the deal. The city doesn’t have to pay out a single dime to do that swap. It is actually going to reduce their operational costs over the lifetime of the project. It’s a no brainer. This is the kind of efficiency stuff that we really need to look at in a serious way as an investment thesis over the next 20 years.

 

That’s how you do energy transition without expensive and risky nuclear plants. [Nuclear plants] that are always over budget and always take years longer to build than you think they will, that always need hundreds of billions of dollars of federal money of insurance back stops and fed loan guarantees and handling of the nuclear waste, which we still don’t have a solution for. Forget that with past trends, global energy consumption is going to be 4x in the future; what’s going to happen is we’re going to improve efficiency through creative financing, we’re going to stop all the thermal losses, we’re going to find ways to run vehicles more efficiently and then hopefully get out of our vehicles entirely and go to rail and bicycles and small circuit buses and so on.

 

Seth: So aside from opening a bike store or investing in solar photovoltaics, what other great options would you recommend for people looking to invest in the future right now?

 

Chris: If you are a home owner, I think one of the best investments you can make is improving the energy efficiency of your house. There’s a lot of leaky houses out there that have little to no insulation. [So many houses] have numerous leaks, single pane windows and so on. There’s just trillions upon trillions of dollars of infrastructure rebuilding that we need to do for reducing thermal losses in the built environment. That’s a huge thing and anyone who owns a building could do it.

 

Storage is becoming a more viable part of the total energy transition equation. On the one hand, we’ve discovered in recent years that you don’t actually need storage until you get to a relatively high degree of grid penetration for renewables. The IEA recently offered a report saying that with a more networked grid you could provide like about half of total grid power without any particular storage. So it’s only when you get to even higher levels of [renewables on the grid] that we need more storage. So many people have said ‘Well, batteries are too expensive and you can’t do hydro everywhere and so on…’ That is changing. We’re seeing some real innovations happening in the storage market. We’re seeing a lot of money coming into it and we’re seeing storage as a service. In the same way that you can have a company putting solar on your roof under the solar leasing model.

 

With companies like Sunrun, Sungevity, SolarCity, SunEdison, you can have them put solar on your roof, without any money down, and actually reduce your monthly bill a little bit. [There are scenarios where] it actually doesn’t cost you anything to put solar on your roof. There are now companies doing this with storage. They’re doing it because they can allow a commercial-scale installation to fill up battery storage when power grid prices are cheap, and then draw from that instead of the grid in the middle of the day when power prices are expensive. There’s actually a big arbitrage there. These companies are able to take advantage of that arbitrage and actually put a reasonably sized battery array in a commercial building without it costing that business anything; that’s happening on the storage side.

 

We’ve had some really interesting developments in the lab, which are working their way to the commercial market for battery technology, and also in other forms of storage like compressed air energy storage and fly wheels. There’s a real chance, as a recent report from the Rocky Mountain Institute suggested, that consumers are going to be defecting from the grid. Put some solar on the roof, some batteries in the basement and just disconnect. This is not impossible. It has been technically possible to be off grid for many years, but it has been expensive. That’s no longer going to be the case. It is no longer going to be so expensive. It is actually going to make good economic sense for a lot of people.

 

Justin: As we see the numerous oil-by-rail explosions, coal ash spills, and the dark side of our energy obesity in the United States that was often pushed into other parts of the world, the consequences of our reliance on fossil fuels is becoming very real and visceral to a lot of people. Are we really at an energy transition tipping point now? If you were to project out an ideal, Chris Nelder world of energy transition, what would it look like?

 

Chris: As I recently wrote, I believe we are at a tipping point.

 

I believe we’re at a point where renewables are going to continue becoming more affordable while fossil fuels continue to get more expensive, and more risky. People are going to continue to become even more sensitized to the risk of our dependence on fossil fuels. [These trends] are just going to continue pushing us to renewables. I don’t think that can be reversed.

 

Not only have we seen all of these different exploding trains full of crude oil, we’ve had gas pipeline explosions. Recently, several people died in NYC when a whole building blew up from a gas pipeline explosion. A lot of that is because of old infrastructure. We’ve actually seen a lot of natural gas pipelines exploding due to old infrastructure. We’ve got coal ash spills rendering water supplies unusable and contaminating rivers. If you want to ask yourself, ‘What does the future look like?’ or ‘Have we reached a tipping point?’ You should be asking yourself, is any of this reversible?

 

Are solar systems and batteries and wind turbines suddenly going to start getting more expensive again? Is nuclear and coal suddenly start going to get cheaper? No.

 

Is there any reason to think: We are going to see fewer ruptures and spills from oil and gas pipelines? We are not going to see more of the thousand coal ash waste sites scattered around the US facing problems? A lot of these things have been sitting there for 30 or 40 years and people have actually sort of forgotten about them because they aren’t being actively filled anymore.

 

Is there any reason to think: People in the developing world, who still lack reliable power, are going to continue turning to filthy diesel generators and kerosene lanterns? Or are they going to adopt these new little solar lanterns which are now selling several million units a year world wide? Absolutely. Many of people in the non-OECD can’t afford the cost of kerosene and diesel anyway. A lot of people have suggested that in the same way Africa never built out the POTS telephone system and instead just jumped straight to mobiles, the same thing is going to be true for them with grid power. They’re going to jump straight to small micro grids, small off grid solar and wind based systems.

 

My call is that the energy transition tipping point is here and there’s going to be no going back. It may be hard to see when renewable energy is still just a few percentage points of global supply.

 

If you are not really paying attention to the trends, you could look at renewable energy and say, ‘That’s just a small portion.’ Or, you can look at energy efficiency improvements and say, ‘They are expensive and though it has a bit of a return on investment, it is not that interesting.”

 

Well, when you step back and look at the larger trends, it is a whole different picture.