Doing the Math on Climate Divestment

I just got back from the Do The Math event in Boulder.  The touring show is an outgrowth of Bill McKibben’s piece in Rolling Stone this summer, Global Warming’s Terrifying New Math.  The argument is elegant and horrifying: if we want to keep global temperature from rising more than 2°C, we can emit at most 565 more gigatons of CO2, ever.  Currently, the global fossil fuel industry’s reserves total nearly 2800 gigatons.  That carbon accounts for a substantial fraction of their overall market value, and at least 80% of it must never be extracted.  Ergo, we must necessarily bankrupt pretty much all of them, and soon.  At our present burn rate, we’ll have used up the 565 Gt allowance in about 15 years, taking us well into that part of the map where, as they say, there be dragons.

I get all of the above, and am enthusiastically in support.  However, I’m confused by the logic of McKibben’s suggested first salvo against the industry.  He is promoting a divestment campaign, along the lines of the one aimed at apartheid South Africa in the 1980s.  In this campaign, institutional investors susceptible to moral or public relations arguments — like pension funds, church congregations and university endowments — are being encouraged to purge their portfolios of fossil fuel related securities.  There seems to be widespread confusion as to what this would mean in a purely financial sense to the targeted companies.  Certainly the audience was confused, but I couldn’t tell what McKibben and the other folks on stage really thought.

So, what would happen if a major swath of the world’s institutional investors dumped their fossil fuel stocks?  Presumably, this would depress the industry’s stock prices, by reducing demand.  But would this actually hurt the companies in any way?  The simple answer is no.  Most people I talked to seemed to think that by selling stock, they’d somehow be taking money away from these companies.  That’s just not how stock works.  The only time you’re buying stock from the company itself, and giving it funding, is at the initial public offering (IPO), or, occasionally, in subsequent public financing rounds, where new shares are issued, diluting existing shares.  Institutional investors owning shares of publicly traded companies are trading with other investors, not the company itself.  You can’t go to a company and say “I want my money back” after they’ve issued the stock.  Sometimes companies that are sitting on a mountain of cash will voluntarily buy back their own stock, but this results in the value of remaining outstanding shares appreciating — you’re sharing ownership of the same business over fewer shareholders.  Buybacks are often used as a tax efficient way to return earnings to investors, since dividends are taxed as income, but share price appreciation is taxed as capital gains, and those taxes can be deferred indefinitely.

The stock price of a company that’s in financial trouble goes down, reflecting that financial trouble.  Artificially depressing that company’s stock price doesn’t induce financial trouble.  What would it do?  It would lower the price to earnings (P/E) ratio, which would increase the dividend rate.  It would make the companies with stable underlying businesses more attractive stock purchases, and in a purely financial world, other less morally encumbered investors would buy up all the dumped shares, probably severely limiting any depression of the stock price.

The fact that climate divestment won’t starve the fossil fuels industry of capital doesn’t necessarily make it a bad idea.  So what are the other potential consequences of a successful divestment campaign?

Getting churches, universities, pension funds and other institutional investors to divest would decouple their financial interests from those of the fossil fuels industry.  This might make it easier for divested institutions to take strong political stances on climate change.  At the same time, as an individual, unless you have a lot of money invested, or live in a very efficient house and refuse to drive and fly, you’re more tightly bound to the financial interests of these companies via the prices of the fossil fuels you consume, than by the prices of the stocks of the companies that produce them.

If you’re feeling optimistic, getting institutions you care about (or depend on) to divest from the carbon industry might be seen as self-interested.  If we succeed in keeping 80% of the world’s booked fossil fuel reserves in the ground, then all these companies are the walking dead.  Like the hordes of zombie banks created in the financial collapse a few years ago, in a world that rises to meet the climate challenge, they are already bankrupt — they just don’t know it yet.  If you really believe we’re going to succeed, divesting is clearly the right thing to do financially in the medium to long run.

Probably most importantly, the campaign is aimed at branding fossil fuels as a morally repugnant investment, both explicitly and by analogy with the apartheid divestment movement.  In the case of South Africa, it was successfully argued that companies taking advantage of apartheid were benefiting from a form of legalized slavery, and anybody sharing in those profits was, in some part, morally equivalent to a slaveholder.  In the case of the Carbon Lobby we’re not slaveholders, we’re waging a war on the future.  This is particularly ironic in the case of university endowments, which support the education of young people, who will live further into that war-torn future than the rest of us, and pension funds that ostensibly work to ensure we are supported in our old age, as much as 50 years hence.

Morally repugnant industries are often allowed to operate, but their political influence becomes diminished and expensive.  Unless you’re actually representing a tobacco growing district, it’s tough to stand up publicly these days as a politician and rub shoulders with tobacco companies.  Their veneer of respectability has been peeled away.  This has made advertizing restrictions and smoking bans and hefty sin taxes politically possible.  If fossil fuel extraction were broadly accepted as a repugnant transaction, would it remain politically feasible to continue spending  five times as much on fossil fuel subsidies as we do on climate mitigation?

In the case of the technology driven oil and gas development and exploration, one might hope that a successful re-branding of the carbon industries as repugnant dinosaurs waging a war on the future would make it more difficult for these companies to recruit young technologically savvy talent, at any price.  Will petroleum and coal mining engineers one day feel unable to mention their work, for fear of public shaming?

This shift in our cultural norms about whether releasing geologically sequestered carbon is morally defensible is necessary, I think, but like virtually all climate campaigns it is not alone sufficient.  Especially in the energy-intensive developed economies, shaming and shunning the fossil fuel industry must also involve some amount of self-flagellation today.  It runs the risk of guilt-tripping people whenever they buy gas or fly, or leave the coal-fired lights on in the kitchen overnight.  That guilt can induce people to tune out, if they don’t feel like they have any alternative to their “bad” behavior.

We need to aggressively create those alternatives by creating paths to high-renewable penetration electricity, building cities for people that don’t depend on cars, inter-city high-speed rail that doesn’t suck, re-solarizing our agricultural systems, requiring the highest possible building energy efficiency, and mandating closed-loop zero-waste materials systems whenever they’re possible.  We also need to make sure we brand the fossil fuel industry as other.  We need a Them.  They take hundreds of billions of dollars in subsidies every year.  They fund disinformation campaigns on climate.  They spend half a million dollars a day lobbying congress.  They are the problem, preventing necessary change, preventing us from adopting systems that don’t wage war on the future.  This otherness can forestall that feeling of short-term guilt.

This may sound like irresponsible heresy in the face of a tidal wave of consumer green marketing.  However, the vast majority of our emissions and resource utilization are systemically determined, and are not susceptible to significant change through personal choices alone.  Those necessary systemic changes are being blocked in large part by industry lobbying and disinformation.  In that arena of systemic change, which is what matters most, it really is Us vs. Them.

Could utility ratepayers be paid to accept fuel price risk?

Risk isn’t free; it’s a traded commodity with a price.  Most prudent financial entities with a lot of exposure to the prices of natural resources try to manage unpredictable fluctuations in those prices by trading in risk.  Producers worry about prices being too low; consumers need to protect against prices being too high.  Risk trading (hedging) allows the two types of parties to share these risks, and so create a more stable market overall.  Stable prices are good for business.  You can plan around them in the long term, even if they end up being a bit higher on average.

In regulated electricity markets like we have in Colorado, fuel price risk often ends up being borne primarily by the rate payers rather than by the utility companies.  In theory, state regulators ought act on behalf of the public (energy consumers) to accurately represent their tolerance of or aversion to risk in the resource planning process.  Historically, the implicit assumption has been that the rate paying public is fairly risk tolerant, i.e. very little has been done from a regulatory point of view to avoid the potential detrimental effects of future fuel price volatility.  This is a historical accident.  Until recently, we didn’t have much choice in the matter.  Of all the major sources of power available a century ago when we began electrifying society, only hydroelectric is similar in terms of its capital and operating structure to distributed renewables like wind and solar.  All three have relatively large up front capital costs, and low ongoing operating and maintenance expenses.  But for most of the time we’ve had electricity, most of that electricity has necessarily been dependent on fossil fuels, and so the question of whether or not customers wanted to take on the risk of future fuel cost fluctuations was immaterial.  Fuel was the only option for expanding our electricity supply once we’d tapped the easily accessible hydro — if you wanted lots of power, it simply came with fuel price risks.  This is no longer the case.  Today, we have options that trade off between cost and risk, but so far as I can tell we haven’t done a good job of talking about the entire spectrum of possibilities.  Broadly they seem to fall into four categories:

  1. Traditional fossil fuel-based power, that exposes rate payers to the full range of future price fluctuations.
  2. Capital intensive, fuel-free power like wind, solar, enhanced geothermal and hydro which have a range of prices, that are very predictable over the 20+ year lifetime of the capital investment.
  3. Fossil fuel-based power that is aggressively hedged, in order to protect rate-payers against future fuel price fluctuations.
  4. Fuel-free power with predictable future costs, combined with someone else’s fuel cost risks, which rate-payers would be paid to take on.

The first two options are the most commonly discussed.  The third — hedged fossil fuels — is becoming somewhat more common, with some public utility commissions requiring the utilities they regulate to dampen fuel cost fluctuations.  However, they generally do not require the utilities to hedge to the point where the risk profile of the fossil fuel option is similar to that of fuel-free power sources.  This is what makes the fourth option interesting.

Continue reading Could utility ratepayers be paid to accept fuel price risk?

Hot Air About Cheap Natural Gas

When people compare the cost of gas-fired electricity and renewables, they usually don’t price fuel cost risks, and at this point that’s really just not intellectually honest.  Risk-adjusted price comparisons are very difficult because nobody will sell a 30 year fixed price gas supply contract, and that’s what you’d need to buy to actually know how much your gas-fired electricity will cost.  Even a 10 year futures contract doubles or triples the cost of gas.  You can’t buy renewables without their intrinsic fuel-price hedge, and that hedge is valuable.  The question shouldn’t be “Is wind the absolute cheapest option right now?” it should be “Given that wind will cost $60/MWh, are we willing to live with that energy cost in order not to have to worry about future price fluctuations?”  And I think the answer should clearly be yes, even before you start pricing carbon.

Global Warming’s Terrifying New Math

Bill McKibben looks at Global Warming’s Terrifying New Math via three numbers.  The problem at hand: if we want to limit warming to 2°C, we can only (globally) put about 565 more gigatons of CO2 into the atmosphere.  Unfortunately the fossil fuel industry already has about 2800 gigatons worth of reserves on their balance sheets.  If we are to avoid profound alteration of the climate, all those reserves will have to be written off and taken as a loss.  This will, of course, bankrupt the entire industry.  That’s the goal.  It’s them, or the atmosphere.

Colorado to preempt local regulation of oil and gas industries

Fracking site close to Platteville, Colorado

(Fracking site close to Platteville, Colorado by Senator Mark Udall on Flickr)

With the introduction of the Halliburton Loophole in 2005 the Federal government largely abdicated its role in regulating the water quality impacts of oil and gas extraction. Local governments have been forced to step up, and communities in Colorado has been at the forefront of that effort. Routt County now requires stringent baseline water quality testing (PDF) before development can begin, and monthly re-testing during operations. The city of Longmont has banned all surface pits (PDF). The oil and gas industry is striking back against these efforts, with Colorado Senate Bill SB12-088 (PDF) which would preclude local governments from regulating oil and gas operations. If passed, this bill would slam the door on any potential regulation of fracking on our county open space lands.

A messy patchwork of different regulations in every little jurisdiction would be costly and legally dangerous for the oil and gas industry. The credible threat of such a patchwork is one of the few points of leverage we have, to get them to accept reasonable regulations at the state or national level.

If you’d like to retain the right to regulate — locally — the activities of these industries then please call and write the Senate Local Government Committee listed below. You may also attend and testify at the public hearing on the bill if you wish: Thursday, Feb. 16th at the Capitol Building, Senate Committee, Room 353, likely between 9:15 and 9:45am.

Capitol Phone: 303-866-4875

Capitol Phone: 303-866-4873

Capitol Phone: 303-866-4852

Tim Neville
Capitol Phone: 303-866-4859

Capitol Phone: 303-866-4884

(h/t NRDC Switchboard and Colorado 350, also posted at The Boulder Blue Line)

Is Keystone XL Really Game over? | RealClimate

RealClimate looks at Hansen and McKibben’s statements that the Keystone XL is essentially “game over” for the climate.  All that really matters in the big picture is the absolute amount of carbon we release.  How fast or slow we do it is of little consequence, because the effects last on the order of 10,000 years.  If we’re aiming for 2°C of warming, or 450ppm CO2, and we assume that all of the world’s conventional oil and natural gas reserves are going to get burnt because they’re just too convenient, then we’re left with another 260 gigatonnes (GT) of carbon that can be released cumulatively from other sources.  The Athabasca oil sands in total contain 230 GT (close enough to call it game ending) but not all of that will be producible economically.  Even if we decide to go ahead, only a fraction of that will end up in the atmosphere.  The Gillette coalfield in Wyoming’s Powder River Basin on the other hand contains about 70 GT of carbon in total, maybe half of that eventually being exploitable.  Globally there are only 2 large tar sands deposits (the other being in Venezuela), but there’s a pretty large amount of coal… something like 800 GT of carbon equivalent appears to be economically accessible, and that’s far more than enough to fry us.  So the Keystone XL pipeline and the tar sands in general are certainly significant battles, unlocking vast amounts of carbon, but in isolation, they’re not enough to end us.  But then of course, they don’t exist in isolation.  Going ahead on these non-traditional fossil fuel projects means we at some level intend to just Burn It All.

Debating Municipalization with Plan Boulder County

Are We Ready to Rumble?

Ringmaster John Tayer (center) introduces the municipalization contenders.  From left to right: Bellemare and Miller (against), Weaver and Regelson (for).

Plan Boulder County put on a well structured, and well attended debate of the utility municipalization question Monday night.  The forum pitted Ken Regelson and Sam Weaver from Renewables YES! against David Miller, representing the Boulder Smart Energy Coalition (which recently sent out a glossy Fear, Uncertainty and Doubt leaflet to many Boulder residents) and Bob Bellemare of UtiliPoint International — a consultant hired by Xcel Energy.

First each side got to make a 10 minute introductory statement or presentation, followed by a series of pre-submitted questions, posed by the moderator.  Finally, written questions from the audience were vetted by someone from Plan Boulder and passed on.

Ken and Sam’s intro attempted to get across the basic results of the citizens modeling effort their organization has put together.  Among them:

  1. We can achieve rate parity with Xcel while reducing CO2 emissions by 67%, using natural gas and a 40% renewables mix, if we assume startup costs of $250M to $400M.
  2. Coal and renewables simply can’t play well together on the same grid.  The renewables get curtailed because coal fired power takes a long time to turn on and off.
  3. Xcel’s business model, based on large existing investments in coal, can at most accommodate a 15% reduction in CO2 emissions.

David Miller was supportive of meeting our Climate Action Plan goals, but seemed unsure whether going after the emissions due to power generation was the best strategy, suggesting we might instead focus on demand side management, energy efficiency, and the use of RECs.  As with the flyer circulated by his organization, most of the points he made focused on cultivating uncertainty.  He was apparently choosing to ignore, or unwilling to accept the conclusions of the City’s consultants and the citizen modeling effort.  Two points he made which I thought did warrant real concern:

  1. About 75% of Boulder’s energy consumption is commercial/industrial, and that constituency isn’t directly represented in the voting public.
  2. It is important that we not let the municipal utility’s revenues get entangled with the City’s general funding, as it sets up all kinds of poor incentives for the organization, and leads to an opaque city revenue scheme.

All in all Miller seemed earnest, but less informed than he ought to have been.  Maybe that’s not his fault — based on the Plan Boulder flyer, it looks like Craig Eicher, Xcel’s community affairs manager for Boulder, was supposed to be sitting in his seat.

Bob Bellemare on the other hand seemed like a more practiced, more active disinformer, mostly trying to seed doubt in the minds of listeners.  Among his recurring points:

  1. Hardly anybody ever succeeds in this process.  Maybe one city every decade nationwide.
  2. Once you vote in November to begin, it will be very difficult to actually stop the process, regardless of what “off ramps” you’ve supposedly put in place.  The only way it ever seems to happen is by voting in a new city council.
  3. Your cost estimates are wildly wrong.  It will be much more expensive, and take much longer than you think.  You will probably lose money.
  4. There’s no reason to think that your local monopoly (the municipal utility) will be any less monopolistic than Xcel.

The point about stopping the process often requiring the voting in of a new council seemed like a thinly veiled political threat.

Often the debate became one side asserting some number, and the other simply claiming it was wrong.  Stranded costs, separation costs, fuel costs, interest rates, etc.  At some point Bellemare claimed that Xcel was going to be shutting down half its coal plants, which got shocked and appalled looks from both Ken and Sam.  Half?  Really?  Their counter claim was that generation was dropping from 2400MW to 2000MW of coal (a 1/6 reduction, not 1/2).  When quantitative issues become he-said, she-said, all you can do is get someone to go look at the calculations or data.  In this sense, I think the proponents of municipalization have a big advantage.  Their models are all public.  They’re willing to have you examine their assumptions and check their work.  Xcel on the other hand has been very cagy with their data, and are unwilling to give detailed background on where their estimates are coming from (it took months just to get the city’s power consumption profile… and only happened after we’d gotten similar data from Ft. Collins).  All you get the end result and a “Trust Us…” which unsurprisingly makes municipalization look like a lousy deal.

Some of the audience questions were actually quite good.  Somebody requested that each debater disclose how much they were being paid (if anything) to participate, and by whom.  Weaver and Regelson (and the Plan Boulder moderator) are volunteering their time without pay.  Miller received a few hundred dollars from the Boulder Smart Energy Coalition.  Bellemare is a paid consultant working for Xcel and “[his] financial arrangements are not a matter of public information.”

At some point near the end of the debate, it became clear that the proponents of municipalization were winning pretty unambiguously in terms of both information and eloquence, and they became a bit more aggressive.  Miller claimed that obviously our rates would have to go up in a less carbon intensive scenario, as renewables are simply more expensive — just look at all the renewables assessments on our bills.  Weaver took almost violent objection to this point, noting that wind is already the same price as coal, we just can’t take advantage of it with the coal fired grid we’ve got today because of the baseload/curtailment issue.  He further noted that while solar is more expensive today, it’s dropped 40-50% in cost over the last 5 years to around $5.15 per installed watt, and if/when it gets to $2.75, it will be cheaper than grid power.  At which point, he envisions an explosion of distributed generation, “behind the meter” i.e. outside of Xcel’s control, which he believes will prove disruptive to Xcel’s business model.  It came off as being somewhere between a warning and a threat.

The final question, which came directly from the moderator, was on the larger consequences of the decisions being made, both for other communities watching the process, and for the future Boulder 10, 20 or even 50 years on.  The proponents of municipalization clearly felt that we are attempting to set an example for others, of creating a scalable, replicable, financially and climatically responsible power system.  One which a few decades hence they also expect Boulder ratepayers to be thankful for, due to much lower exposure to high and volatile fossil fuel prices.

Miller held out hope that we would find a “third way” to achieve our goals, also setting an example for other communities, though he didn’t lay out in any detail what such a third way would look like, and how it could work from within the confines of the Xcel energy system.

Bellemare felt that regardless of the outcome of the election it would have little effect more broadly.  Every franchise agreement is different, state regulations are different, what you learn in one place doesn’t really transfer well to others.  (Nobody’s watching.  What you’re doing doesn’t really matter.)  Should the ballot measure succeed, he expected 5 years of wrangling to get the utility set up, and another 5 years before we really figured out how to run it.  Twenty or fifty years on?  Well, who knows…  If the ballot measure fails, he expects Xcel and Boulder to keep on working together as they have for years, continuing to build one of the nation’s best energy efficiency programs.

This inspired a pretty loud response from Ken… who noted that yes, we do have one of the best efficiency and renewables programs in the nation for an investor owned utility, but several municipal utilities do far better, Austin, TX and Sacramento, CA were mentioned as examples.

Based on their overall performance, it seemed pretty clear to me that the proponents of municipalization can win if they’re given a fair forum.  It’s less clear to me how they will fare in the decidedly unfair landscape of full page newspaper ads, push polling, semi-anonymous glossy mailers, radio sound bites and yard signs.  In those fora, money talks much louder than good information, and Xcel has a lot more money at their disposal than we do.  We need to change that.