Wellian Weekly 16.03.2020

Too Big To Fail

I am a full believer in the cases put forward by climate scientists in relation to carbon emissions, global warming, climate change and the potential devastating effects that will befall our planet if we don’t do something and do it quickly.  I’m doing my bit – solar panels have been on our roof for almost a decade; we drive a hybrid car; we recycle; we compost; our red meat intake has been curtailed massively; I walk lots of places; the use of public transport over taxis is the default option and so on, every little helps.  But, wouldn’t it be great if these 2050 targets were achieved BEFORE 2050? it feels a little like when I was at school – rapidly rushing my homework on a Sunday night for handing in on the Monday morning…  although 30 years away, this time will fly by. It is often said that the best time to make this change was 20 years ago; with the second best time being today.

So, what does climate change have to do with the title of this piece?  Simply put, could the energy businesses be the companies that are at the centre of the next global crisis? Renewable energy is the future of energy production, it will take over from fossil fuels. It will take time; it will cost a great deal to transition. But, there is not enough renewable energy out there today, and this is partly why there is a fulfilment date of 2050. But, what happens if everybody – individuals and corporates alike decide to change their electricity provider to a green energy business tomorrow? There would be global problems.  More scarily, what if energy businesses decide they want to turn off all energy generated by fossil fuels? On one hand, not burning fossil fuels will be good for the environment. On the other, the world will grind to a halt. What would happen to transport? To heating? To business? Not sure that would be good for the social or economic environment.

When Bear Stearns and Lehman Brothers collapsed to spark the global financial crisis, there was a centralised, synchronised effort to put liquidity back into the system by the central banks of the world.  Fortunately, central banks understand the money flows and the interconnectedness of the global monetary system. Central banks understand because they are run by bankers. What would be the case if the demand of how electricity was produced changed? Who would be able to know how the electricity grid works properly? What is the electricity equivalent of the central banks?

What if electricity businesses said they were turning off traditional measures of how power was generated and only use renewable sources from now on? Could the traditional sources hold the country to ransom? Someone would have to step in – obviously the central government, because they have the money, but how would the demand be filled? Who has the knowledge of how to replace the supply? How quickly could it be done?  (Odds are it will be before 2050…) I would guess the companies that have the best knowledge, experience and ability of how to convert the world to renewable energy are presently the existing large energy businesses. The incumbents. But, aren’t they conflicted? You have the power to change your business plan, but the amount of change you need to go through is huge… If it ain’t broke…  Maybe this is one of the reasons why the deadline is 2050 – by then it is someone else’s problem.

I would assume the supply chain would need several years to be able to construct the amount of windmills, solar panels, wave machines and the like to convert to renewable and remove our reliance on fossil fuels, but are they working at 100% capacity, and if not, why not? What are the capital expenditure budgets like? Could they be higher? Could the transition to renewables be sped up? Could the government intervene? Would tax incentives speed up the process? Could there be favourable rates for companies to borrow so there is the potential for financial gain for those willing to take the risk? Debt financing for infrastructure products would be attractive due to the long duration of the asset class. With interest rates as low as they are, could this be an alternative to QE that would actually be felt in the real economy as opposed to the financial economy, whilst at the same time potentially saving the planet?


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