Talking energy markets with Michael Liebreich

6 February 2015

Falling oil prices have left economists scrambling to understand the possible ramifications for future energy investment flows both in fossil fuels and clean energy sources. Moreover, how might this affect climate policies, particularly as governments gear up to hammer out a global climate deal at a UN conference in Paris, France at the end of this year? And how to ensure sustainable development in the context of the need to transition to a low-carbon economy? In late January BioRes spoke with Michael Liebreich, Founder of Bloomberg New Energy Finance (BNEF), on energy market expectations, climate change, clean energy technology diffusion and trade, as well as carbon pricing. 

The oil price has plummeted in recent months putting into question the viability of oil production in certain regions. How do you think investment in energy will be affected and will there be the same or different impact on old energy versus new energy?
[Michael Liebreich] We are just seeing numbers from Fatih Birol, chief economist at the International Energy Agency [IEA], suggesting that investment in oil and gas is likely to be down by about 10-15 percent on last year. I actually think it will be more dramatic than that. I think that may well be the right number if you also include national oil companies, but then if you look at the unconventional, I think they are going to be cutting maybe between 30-50 percent. It will be a very substantial drop.

If you look at clean energy, we may have a slightly down year, but it will be more to do with US currency than with slowing investment. We count our figures in dollars, which means the same Euro investment this year is going to turn into fewer dollars, so I think we may see a flat or slightly down year from the US$310 billion renewables investment total Bloomberg New Energy Finance [BNEF] announced for 2014.

So overall what do you think might be the long-term energy market implications and potential climate-related impacts of the oil price drop?
[ML] I’ve never been a huge believer in these very high oil prices because I’m aware of all the alternative technologies. For example, as soon as the oil price goes over US$90-100 a barrel, you get suppressed growth, and you get all sorts of alternatives becoming competitive, whether that’s biofuels or electric vehicles. So for me nothing much has changed because I’ve always expected the oil prices to come down rather than go up.

Meanwhile, I’ve just come from the Middle East where a really important solar project was announced in the United Arab Emirates, with the Dubai Electricity and Water Authority unveiling a 200 megawatt solar plant with tariffs at US$5.84 cents per kWh. Last year we were talking about the lowest cost solar in the world being eight cents, this year we are talking about six cents solar, that’s a 25 percent drop. So yes oil has dropped by 50 percent, and most people expect it will go back up a bit, meanwhile the best clean energy is dropping by 25 percent and it’s not going back up.

When you ask how we are doing on climate, that’s a different question, which focuses more on how we are doing in terms of volume. If you look at Bob Socolow’s climate stabilisation wedges, which suggest you’ve got to do nuclear energy, energy efficiency, carbon capture and storage (CCS), as well as focusing on land use and other things to tackle climate change, renewables is absolutely on track to deliver one big wedge.

If you go to the IEA 2050 energy scenario, which also consists of various wedges, I actually think the organisation is being overly conservative in its main forecast. The IEA seems to suggest that renewable energy growth will ultimately go linear instead of remaining geometric. We think it will continue to remain geometric and the market won’t saturate for many years. Overall renewables are in good shape, energy efficiency is in ok shape, but where we are really floundering is carbon capture and storage [CCS] and nuclear power.

Why do you think this is the case?
[ML] CCS is a hard problem because there’s no real benefit to it beyond reducing greenhouse gas emissions. A bit of enhanced oil reduction (EOR) but doing CCS with EOR is not going to do much for the climate. And the state of the political discussion in most of the world means it is simply impossible for politicians to commit the hundreds of billions that you would need to spend on CCS.

With solar you’ve got the electricity produced, which also has additional paybacks like resilience and air quality improvements, so it justifies a period of price support. Using CCS the benefit is that you mitigate emissions, and that’s it, which is not compelling enough to open the public cheque-book.

Nuclear is where I think the world could really up its game. There are a few countries where there is a sort of hysteria around nuclear. Coal is killing far more people than nuclear has ever killed and it also has severe climate implications.

For countries like Germany and Switzerland that have functioning nuclear power stations and an excellent safety regime, switching those off prematurely is simply economic and climate self-harm on a colossal scale. Japan’s need to buy gas, fuel oil, and coal is burning a hole in its balance of payments. Its economy will remain desperately weak until it manages to restart a fair number of their nuclear power stations.

The debate needs to be properly led by governments’ to explain why nuclear could be a good solution for the climate rather than framed as benefiting companies, and the nuclear industry needs to get on the front foot and start innovating again to bring down costs.

Meanwhile, Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change [UNFCCC] recently said that the oil price drop is a sign that the concept of stranded assets, or the “carbon bubble,” is becoming a mainstream reality. What do you think about this?
[ML] There’s an element of truth in that the drop in the oil price has much to do with vehicle standards and changes in behaviour. For example, in 2007 the US imported around 13 million barrels a day in 2007, dropping to about five million barrels a day last year. That’s eight million barrels a day down but domestic production is only up by four million barrels a day. The missing barrels in this equation can be put down both to Americans driving less and cleaner cars on the market.

I don’t think, however, that the oil price drop has much to do with the stranded asset concept. That’s too much of a leap. The climate community talks about a carbon bubble, warning that when the world realises fossil fuel assets have to stay in the ground, markets are going to write down their value and there is going to be a meltdown in prices so dramatic that it threatens global financial stability. But we’ve just had a meltdown oil price right now, a 50 percent drop, and no one is talking about systemic instability. The stranded assets narrative has been enormously over-sold, in my view.

An interesting rebuttal. You talked about clean energy technologies earlier. What are the major drivers of innovation in this area at the moment?
[ML] I think in the long-term the single most important driver has been high energy costs. Other than North American gas, we’ve seen nearly a decade of high energy prices around the world for every sort of energy, and as a result you get innovation.

Then you’ve got a few other trends also in favour of innovation. The Chinese economy is much more sophisticated now than a decade ago, with much more money going into Chinese universities, and we’ve seen a whole load of process innovation from Chinese manufacturers.

What do you think is driving China’s interest in this area?
[ML] China has gone through different phases. If you go back seven or eight years China’s great clean energy awakening was really about creating jobs through exports. If the Germans were foolish enough to overpay for solar panels, then China would manufacture them. Then they morphed into doing clean energy because the cost was coming down and they understood they needed to use these technologies domestically because of a huge energy need. 

Now it’s more about cities and air pollution. The legitimacy of the communist party in China is related to delivering the goods. If people have to run around with masks on their faces the party has a potential problem with social instability. I think the Chinese clearly are concerned about climate change. They are also moving to a stage of more geopolitical maturity.

They are moving beyond defining success as “tying America’s hands whilst remaining scot-free ourselves” – which is basically the UNFCCC’s Kyoto Protocol – to understanding that as the largest emitter in the world such a position doesn’t work strategically, it’s just not a credible negotiating position. Yet I wish India would come to the same realisation.

US President Barack Obama visited Indian Prime Minister Narendra Modi in January and we’ve seen some outcomes on cooperation around clean energy. What do you think about those dynamics?
[ML] I think that’s entirely the right discussion to be having. When I say India hasn’t been helpful in the UNFCCC climate negotiations that doesn’t mean I think they should commit to a carbon cap or anything dramatic like that.

What I mean is that we need to find Pareto optimal solutions between the developed and developing world on the climate front, in other words, how to make one party better off without making another party worse off.

Attempts in the UN climate talks to divide climate budget between nations are always going to fall apart. We saw it before and after the 2009 talks in Copenhagen that no leader in their right mind will accept up front the sorts of carbon budgets that are needed to successfully tackle climate change and therefore you have a very fractious and unhelpful discussion. India has 1.3 billion people and currently consumes, on a per capita basis, a fraction of what the US consumes. Framed in this way the carbon budget conversation doesn’t work.

A better way forward is to acknowledge India has every right for their populations to advance economically but does it have to go down the same economic and energy technology path as the developed world? What if developed countries were to help nations such as India leapfrog to a completely new energy system that doesn’t have these terrible impacts on air quality, climate, geopolitical instability, volatility, balance of payments and so on? Developed countries have plenty to offer in this framework: technology, capacity-building, finance, access to markets. From a negotiating point of view this sort of joint problem-solving is much more likely to lead to a good outcome.

What role might trade play in advancing the cause of clean energy?
[ML] I’ve always thought global trade should play an absolutely key role. I’m only sad that in the clean energy and climate communities there aren’t enough people who have thought about it. Trade is technical, quite wonkish, and slow. Among many on the political left it is also seen as threatening and negative.

The key issue for clean energy is actually around cost. The costs come down when you use the lowest cost technology, the lowest cost finance, and the best skills - and that means free flow of goods, services money, and people. Anything that impedes these is bad for the energy transition and almost anything that accelerates that is good. That was why a few years ago I started to float the idea of a sustainable energy free trade area in order to lever the issue of clean energy trade out of the Doha Round. And I do continue to think this sort of thing is critically important.

The fourth round of the plurilateral Environmental Goods Agreement [EGA] talks is focusing on cleaner and renewable energy as well as energy efficiency. What do think about this trade negotiation?
[ML] The Environmental Goods Agreement could be an enormous boost for the clean energy industry. We’ve got to get a good and broad outcome this year. I’m not following the talks very closely but I do receive updates. I was worried that the negotiations would be difficult, and would end up reducing the list of potential goods slated for tariff liberalisation particularly around so-called dual-use products, for example components used in wind turbines that are also used in locomotives.

It sounds to me like the current discussion is a different one, more positive, around what you should include. What the sector needs is a really long list in order not to limit technologies which play a key role in renewable energy deployment.

The Environmental Goods Agreement could be an enormous boost for the clean energy industry. 

And if the EGA ends up reducing tariffs on non-clean energy sectors as a by-product, then do you know what, good on it. At the end of the day that will just lead to faster economic growth, more people pulled out of poverty, and more robust recovery from the great recession. I would really urge the negotiators to go for a maximal rather than a minimal list.

Energy acts as lifeblood of the global economy. Accounting for the continued uncertainty around the oil price in the months ahead, what would be your key expectations for energy markets in 2015, a year slated by many as fundamental for sealing a new sustainable development agenda?
[ML] I think the oil price is going to remain low for all sorts of reasons. I look at two schools of thought; one says that it was a flash crash, the Saudis are inflicting some pain, and the price will soon go back up. Another school says that the US$50 per barrel is the new normal. I think it will be more like between US$50-80 per barrel. Frankly I’m amazed, however, that anyone listens to any oil analyst at all given how abjectly they’ve performed last year. Gas will probably have downward pressure because Europe’s growth remains slow, in Asia there’s a lot more supply coming on, and the US still has a gas glut.

In clean energy, I think we are going to see continued progress on costs and a lot more on energy efficiency too. Meanwhile energy access is exploding and cheap solar is helping. There are some commentators who mock solar lanterns from their comfy offices in California, but if you are the one burning kerosene for light and having to walk four miles to get your phone charged, solar lights are life-changing and they are flying off the shelves now in India and Africa.

What I would like to see during this year is much more coherent progress on the so-called “energy escalator.” You have a solar lantern or a couple of lights, but how do you power your fridge, your sewing machine, etc., you’ve got to move up the energy escalator to get people more economically active and really boost development.

From a big picture perspective, I always react against the idea that the world needs a global carbon price, because one single carbon price is unrealistic. What you need instead are multiple carbon prices for different sectors and technologies. If you really want to get the world off fossil fuels you need what I call a “high-low” price for fossil fuels; a high price for consumers, so they switch to alternatives, but a low price for producers so they invest less. The only way to get this sort of “high-low” price, you need to use fiscal policy, in the form of a carbon tax, or a tariff, to sit between the producer and the consumer.

I would also like to see more work coming out of the trade community on carbon border adjustments (CBAs). Not because I would like to see them actually imposed any time soon, but because we need a coherent and legally robust approach that’s been properly debated, in case we need it. Otherwise, if UN climate negotiators get a deal in Paris this year, but then some big countries go for dirty export-led growth – as China did after Kyoto – we will have achieved nothing. We need some sort of weapon to respond and it has to involve CBAs. Likewise it could be a way to respond big oil-producing nations that try to torpedo the agreement.

At the same time as all this, what we need to see happening is for more effective efforts to help developing nations grow in a sustainable way. This is why the conversations around the sustainable development goals (SDGs) are so important.

Unfortunately the SDG process seems to have gone way off the rails. There were just eight Millennium Development Goals, they were very focused and proved very successful. The current proposal is for 17 sustainable development goals and 169 targets. They are terribly poorly drafted, with tremendous overlaps and ill-defined terms, and they also embody a deeply anti-enterprise philosophy. For instance, I think they speak of trade as something the world needs to be protected from rather than as an engine of wealth creation and development, with the occasional ill-effect that needs managing.

There are only a few months before the SDGs are set in stone for the next 15 years and I really hope that our political leaders have the courage to tear up this absurd draft and demand something workable.

Michael Liebreich, Founder and Chairman of Advisory Board, Bloomberg New Energy Finance (BNEF) 


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