Tuesday, December 13, 2011

Hay Festival Kerala 2011 No.10 - Jeremy Leggett, Energy Economist and Entrepreneur


 Leggett: an impending financial crisis threatens as fossil-energy stocks are overvalued

Jeremy Leggett is an activist now, having started out in the oil industry. He started Solar Century, a small renewable energy outfit, backed by venture capital. He campaigns in the Climate Change debate on the side of those who wish to limit the use of fossil fuels.

Leggett sees three threats:
1. A
repeat of the global financial crisis of 2008, transposed to overvalued fossil energy assets, rather than securitised mortgages.
2. Over dependency on oil, and
the 'peak-oil' problem.
3. The
Climate Change threat first to life, and then to the global economy itself.
Consider #1 (Financial crisis)
In order to achieve the goal of not letting the global temperature rise by more than 2 deg Celsius, only 20% at most of the proven reserves can be burned –
80% of fossil reserves cannot be burned if we are to have a 75% chance of limiting to 2 deg Celsius!
Consider #2 (Over-dependence on oil)
Oil supply cannot grow beyond a point to which we are near. This is according to the task force of the UK Industry Task Force. That oil production will peak soon is owing to the flow problem, not to a supply problem. To fill the gap between rising demand and the depletion of existing oil wells. The gap is ENORMOUS. You'll need SIX SAUDI ARABIAs worth of new oil by 2030!!
Consider #3 (Need to reduce carbon)The 2 deg Celsius limit was agreed at the Cancun conference. To attain this target it is universally understood that the world has to reverse out of coal, oil and gas, by 2015.
Leggett says the technology already exists to lead us to a mainly carbon-free future. But these technologies are highly underused. 

Read a complete account below ...

Jeremy Leggett has a small business called Solar Century:
http://www.solarcentury.co.uk/

He is an activist now, having started out in the oil industry. He started Solar Century, a small renewable energy outfit, backed by venture capital. He campaigns in the Climate Change debate on the side of those who wish to limit the use of fossil fuels, and thinks Carbon Capture and Storage (CCS) and stuff like that is a last ditch effort by fossil fuel people to do business as usual. He has a website that reports on the energy debate actively:

After his day job he works evenings and night on a book about the huge problems, and the THREE main threats he sees:
1. Believe it or not, he sees the first threat as
a repeat of the global financial crisis of 2008, transposed to overvalued fossil energy assets, rather than securitised mortgages.
2. Over dependency on oil, and
the 'peak-oil' problem
3. The
Climate Change threat to life first, and then to the global economy itself
Consider #1 (Financial crisis)
We have learnt from the past that threats on the horizon are visible in advance and could have been acted on before the crash of 2008 happened. In Aug 2007 several alarms were raised by responsible people about the new classes of assets created, namely mortgage-backed securities based on loans to low-income people, and the Derivatives created by financial whiz-kids based on that. Gillian Tate of the Fin Times, for instance, suspected that these derivatives were toxic, and quite likely to blow up, if people stopped paying their mortgages in large numbers as was predicted to happen when the interest rates went up after the initial period. The issuance terms of the mortgages made that quite likely. Rubbish!, said the majority, including all the bankers who were profiting from this with huge bonuses. Greenspan lent his weight and passed on the bankers claims, that these derivatives, so far from increasing risk, were actually designed to reduce the risk in the system..

What followed was first the credit crunch (bankers hanging on to their money and not lending it to businesses because when the economy sours, all businesses look dicey to bankers). So money for investment, and money for working capital was blocked. This was followed by the crash of 2008.

In an analogous fashion the current Eurozone crisis owes it origin to a group of people who miscalculated their assets enormously, or the risks to those assets, giving more loans to sovereign governments than was warranted, all because the credit rating agencies were far behind the curve in estimating the risks.
Consider #2 (Over-dependence on oil)
International oil companies say they have plenty of oil to feed growth. Oil is being extracted at 86m barrels per day now. It can rise and continue rising, say the oil companies. Lots of people in corporate boardrooms and govt ministries believe this implicitly. But a minority, Leggett included, believe that oil supply cannot grow beyond a point to which we are near. So says the task force of the UK Industry Task Force which you can read at
peakoiltaskforce.net

That oil production will peak soon is owing to the flow problem, not to a supply problem. The task force concluded:
(a) Oil production will top out by 2015 because most oil wells in production are depleting FAST. The industry's own data shows that.
(b) A whole series of new oil wells, new off-shore drilling, tar-sand extraction, etc will be needed to fill the gap between rising demand and the depletion of existing oil wells. The gap is ENORMOUS. You'll need SIX SAUDI ARABIAs worth of new oil by 2030!!

This all adds up to a situation as bad as the credit crunch of 2007!

Very credible companies run this task force, like Virgin, Scottish and Southern, and a big cross-section of the oil industry agrees with the conclusions, including people recently retired from the oil industry.

Look at the International Energy Agency reports (IEA). Read between the lines and you'll see there isn't a snowball's chance in hell of the the necessary oil becoming available.
Consider #3 (Carbon Asset Class)The 2 deg Celsius limit was agreed at the Cancun conference. To attain this target it is universally understood that the world has to reverse out of coal, oil and gas, by 2015. Legally binding limits have been accepted by UK, and several important countries (not USA, though).

However the civil servants in Government (males in their 50s and 60s) and big energy executives are wedded to fossil fuels. There's a BATTLE OF IDEAS afoot. We the people must join that battle to convince the leaders in government and industry that they are on the wrong track. Big energy companies actively conspire in the Western world (I feel sure it's true in the less developed world too) to suppress renewable energy; but they delude themselves.

It is completely true that all the governments that turn up at the Climate Change conferences are very serious (not sure of the
bona fides of Ms Connie Hedegaard at the Copenhagen summit – she was definitely suspect). However, the capital markets in the West are still invested in coal, oil, and gas and continue to pour the money they attract (from everybody's pension funds too) into those avenues.

A non-profit did an analysis, company by company, and the result is called carbon Tracker at the site:
carbontracker.org

or http://www.esrl.noaa.gov/gmd/ccgg/carbontracker/

In order to achieve the goal of not letting the global temperature rise by more than 2 deg Celsius, only 20% at most of the proven reserves can be burned –
80% of fossil reserves CANNOT be burned if we are to have a 75% chance of limiting to 2 deg Celsius!

Therefore the energy companies are MUCH overvalued, based on the current valuation of their energy assets, 80% of which cannot and must not produce revenue to achieve the 2 degree limit. That is the seed of an impending financial crisis, when the bottom falls out. One third of the London Stock Exchange (LSE) value currently is based on fossil reserves. A bubble is therefore in waiting in which 80% of this one-third is going to be erased some time in the future.

The Capital markets are working on the assumption that the Climate Change negotiations will fail and the 2 deg Celsius will be shattered. On this premise they are bankrolling further oilfield exploration and digging. In fact, there have been actual fistfights on the LSE to bring the Outer Mongolia coal mines onto the LSE to increase the bonuses of the London agents. If you doubt it, Leggett said he is prepared to provide the web reference in the Fin Times. Here it is:
http://www.ft.com/intl/cms/s/0/c8ebc000-33c0-11e0-b1ed-00144feabdc0.html#axzz1enFYun5M
Every part of the financial chain is turning a blind eye to Climate Change: from analysts, to bankers, to oil industry executives.

Here is what the big oil folk reply when the argument is put to them how can these assets be considered safe when these fossil fuels cannot be burned? Their answer is: "This is bollocks," [I suggest they believe in the slogan FUCK THE FUTURE!] to cite a quote from the Fin Times. This attitude is going to have a huge impact n our lives. Because the energy industry has utter contempt for what the governments are trying to do to rein in fossil fuels.
What is the Solution?
None of this dangerous investment of our pension funds in these stocks needs to happen. The technology already exists to lead us to a mainly carbon-free future. But these technologies are highly underused. Even in relatively cloudy Britain solar electric roof tiles can be erected to yield zero net emission homes. Scottish and Southern Power has shown how you can even go energy positive in your home.

With the right partners Leggett's own company can employ any one of four technologies to accomplish this result. Moreover, it is not only new buildings that can have this advantage, for the technologies can be retrofitted with ease. Leggett provided a reference to a lady named Catherine Mitchell, an energy professor, how a householder can retrofit for zero carbon with ease. Therefore, there now exists the possibility for people to take power (in both senses of the term) into their own hands and set up energy sources in their homes. The citizen may not need big energy providing companies along this solution route.

But look at investors. They want to put their money in big energy companies owning big power plants rather than take the micro-generation route (like solar electric tiles of their roofs). Leggett emphasised he is not a socialist, but a modern day capitalist who has seen the future.

Seventy governments had decided to provide feed-in tariff.
[
Wikipedia: Under a feed-in tariff, eligible renewable electricity generators (which can include homeowners, business owners, farmers, as well as private investors) are paid a cost-based price for the renewable electricity they produce. This enables a diversity of technologies (wind, solar, biogas, etc.) to be developed, providing investors a reasonable return on their investments. This principle was first explained in Germany's 2000 RES Act:

“The compensation rates…have been determined by means of scientific studies, subject to the provision that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.”]

The idea was to bring down the subsidies to zero as the cost of renewable energy becomes equal to fossil energy. There are in the UK about 40,000 people working in clean energy jobs and it provides tax revenue by way of VAT on products and services and of course tax on the wages of people employed. but BIG ENERGY only wants big projects for offshore wind, etc and is not interested in micro-projects. Sad to say, the UK Govt has responded to the big oil lobby and cut the feed-in tariff in UK. "The future of our civilisation is at stake, and I am not being melodramatic," said Leggett.

Questions

1. Joe reminded Leggett he had not talked of the high subsidies that that the century old technology of fossil power plants still receive. He said, yes, a close observer of the climate talks to take place in Durban said the
$400bn subsidies devoted to fossil fuels, uncovered by the IEA, were "staggering", and the way in which these subsidies distort the market presented a massive problem in encouraging the move to renewables. The subsidies for renewables were a small fraction of that.

And in the case of nuclear power when you add the insurance cover provided by the public exchequer, and the cost of decommissioning the plants at the end of their life which is also borne entirely by the public, the
subsidy for nuclear power is enormous.

2. Can you run modern economies without oil? A. Yes, there is a German experiment that hooked up towns around the country to constitute a sample of a large population. The result was, you can run without oil for fuel. Another myth is that you must have nuclear for the base load, to account for variations in solar radiance, etc. Leggett cited the project of the German Railways (
Deutsche Bahn) to run the railways entirely on renewables. You bet they will do it too, for they have set their mind on it and they are Germans. You won't be able to shrug off the ability to run a big railroad on renewables, and say its a freak case.

In Berkeley, Calif, there is a modeling study of the World, projecting 11 Tera-watt as the energy requirement by 2030 to show how fossil fuel energy can be entirely eliminated. It can be done by 2030, assuming a rate of mobilisation of technology which is less than the rate of mobile phone usage increase, and far less than the mobilisation of the US economy to build tanks, ships, and planes during World War II.

3. What about additional sources of fossil energy? A. No matter how much the tar sand extraction, and shale gas extraction possibility lies under the ground, you cannot achieve the FLOW RATE required. There is a film called "Gaslands" which tells of the horrific environmental damage caused by the Bush administration suspending all regulation of shale gas. It is primarily a local environmental damage to the water supply, not a global warming challenge. If you had open season on unconventional gas production ("fracking" etc) you'll cook the climate too.

Solar Photovoltaic prices are going down dramatically. Then there's solar thermal. It is sad that energy policy makers go for the bottom line alone. Energy Security is a better goal to aim for. "The CIA would not need to be attacking people with drones if that was achieved."

GE said privately that they are not going to go in first. When they see there is a market and the future is taking off, they are ready with a lot of research and development of pilot plants they have done internally. "Just watch how fast we’ll be," GE insiders say.

Q. What about opposition from big energy? A. One of the observers, using American football terminology, said, "It is no longer the fancy footwork of the offence, it's their defence out on the field to kill you." (the renewables, that is) It is deadly stuff going on. They tell lies. It feels like civil war. The Daily Mail in UK puts out Goebbels-like canards that green energy is responsible for inflation, forgetting that it is the wholesale price of gas and oil in UK that are driving inflation. Leggett URGED EVERYONE TO GET INVOLVED. Go on SOCIAL MEDIA and turn things on for renewables. Leggett talked to the folks in
Occupy the LSE, and was praising the young people for their involvement in important matters that the higher ups are ignoring. He said in his time these people would have been donning pinstripes and going to work for the establishment.

Q. Carbon arithmetic.
A. COAL is the real problem. Oil is less of a problem climate-wise. In UK they should pragmatically expand North Sea oil and reduce coal. China, it seems to me, said Leggett, is in the process of doing something. They are throwing a lot of spaghetti at the wall and seeing what sticks. India, by contrast, is really not pursuing any urgent policies.

A decade ago China had no solar energy. Now every second PV cell in the world is made in China. India is looking at China and hoping to catch up, but India is dependent on coal, like China. It needs to do a lot more on renewables. PEOPLE MUST PUT MORE PRESSURE ON THE INDIAN GOVERNMENT.

Q. What is the carbon footprint of various technologies?
A. The raw material for solar PV electric energy is silicon, and it is not environmentally harmful. Some of the newer PV materials do have problems that need to be mitigated. Battery technology has worries about Lithium. Alternate materials are being sought. For wind, it is concrete and steel for erection and the heavy machinery used in erection, sometimes in remote places.
 

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