Fossil fuel dominance.
The dominance of fossil fuels is coming to an end as the world is quite rightly turning to cleaner, cheaper renewable energy. Although we will still use oil and gas for decades to come, we will use much less, and their importance will diminish over time. So, what does this mean for some of the world’s largest corporations, from Saudi Aramco to Shell, whose high valuations rest on their abundant fossil fuel reserves?
In 2014, Mark Carney, the then-governor of the Bank of England, highlighted the financial danger at hand for these companies by stating at a World Bank seminar that “the vast majority of reserves are unburnable”. Meaning that if we are serious about keeping to our climate targets, large amounts of fossil fuels that currently underpin the valuations of fossil fuel companies must remain in the ground, thus risk becoming stranded assets.
Stranded assets can be defined as assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities. Essentially, it means a lower return on investment – a fate that all industries wish to avoid.
Countries around the world are now quickly decarbonising to stop global warming from exceeding 1.5 degrees, as outlined in the 2015 Paris Agreement. For this target to become a reality, a significant proportion of the world’s fossil fuel reserves will need to be left untouched. Approximately £8.1tn to £10.3tn worth of assets could become ‘stranded’ as we transition to clean energy.
Global impact on pensions and the financial market.
Without appropriate precautionary measures taken, this could lead to a long-term decline in the valuation of some of the world’s largest corporations. It would be wrong to believe that this is only a concern for net exporters of fossil fuels and for the boards of oil, gas and coal companies. Many private pension schemes are linked to oil and gas shares, so a transition away from fossil fuel is the right way forward. The UK, being a worldwide centre for finance, could also be significantly exposed.
However, there are now more opportunities for environmentally conscious investment than ever before, with multiple new green bonds issued every year. By the end of 2021, the green bond market was valued at $443 billion a year, and the size of this industry is increasing year on year, with some predicting this to more than double to over $1trillion a year by the end of 2022. These bonds provide assurance to investors that their money will not go towards fossil fuels, instead it will be invested in projects such as renewable energy, clean transportation, and long-term water management.
Nevertheless, it would be foolish to think that investing in green investment instruments and companies is purely to satisfy an investor’s desire to support decarbonisation. They also provide significant financial opportunities with rapid growth. For example, Tesla’s stock price has increased by over 1,500% in the last five years. Oil and gas companies are not blind to the profitability of this burgeoning industry and are attempting to diversify to future proof themselves. Demonstrated by most large fossil fuel companies now declaring they will be investing significantly in new renewable technologies and infrastructure.
The government’s approach.
The government is doing its bit, encouraging investors to be aware of what they are investing in. This was set out in the government’s report, Greening Finance: Roadmap to Sustainable Investing. Soon the UK will release its own ‘green taxonomy’, which will clearly set out what can be seen as sustainable to invest in. Hopefully, this will go further than the EU’s version, which has been widely discredited due to gas being labelled as a green source of energy.
The financial world has long been dominated by giant fossil fuel companies; soon, this could all change. Even before COVID and the Russian invasion of Ukraine, 95% of new energy production was renewable, showing how we are now in a new era. Those companies who invest wisely and join the renewable revolution may maintain their position at the pinnacle of global finance and industry for the foreseeable future, whereas those who fail to adapt risk stranded assets.
Source – Harry McKay, Climate Programme Intern at CEN
Different types of Hydrogen and their impact pathways.
What is green hydrogen?
In the kaleidoscope of hydrogen colours, green hydrogen is the one produced with no harmful greenhouse gas emissions. Green hydrogen is made by using clean electricity from surplus renewable energy sources, such as solar or wind power, to electrolyse water. Electrolysers use an electrochemical reaction to split water into its components of hydrogen and oxygen, emitting zero-carbon dioxide in the process.
Green hydrogen currently makes up a small percentage of the overall hydrogen, because production is expensive. Just as energy from wind power has reduced in price, green hydrogen will come down in price as it becomes more common.
What is blue hydrogen?
Blue hydrogen is produced mainly from natural gas, using a process called steam reforming, which brings together natural gas and heated water in the form of steam. The output is hydrogen – but also carbon dioxide as a by-product. That means carbon capture and storage (CCS) is essential to trap and store this carbon.
Blue hydrogen is sometimes described as ‘low-carbon hydrogen’ as the steam reforming process doesn’t actually avoid the creation of greenhouse gases.
What is grey hydrogen?
Currently, this is the most common form of hydrogen production. Grey hydrogen is created from natural gas, or methane, using steam methane reformation but without capturing the greenhouse gases made in the process.
What are black and brown hydrogen?
Using black coal or lignite (brown coal) in the hydrogen-making process, these black and brown hydrogen are the absolute opposite of green hydrogen in the hydrogen spectrum and the most environmentally damaging.
Just to confuse things, any hydrogen made from fossil fuels through the process of ‘gasification’ is sometimes called black or brown hydrogen interchangeably.
Japan and Australia announced a new brown coal-to-hydrogen project recently. This project will use brown coal in Australia to produce liquefied hydrogen, which will then be shipped to Japan for low-emission use.
What is pink hydrogen?
Pink hydrogen is generated through electrolysis powered by nuclear energy. Nuclear-produced hydrogen can also be referred to as purple hydrogen or red hydrogen.
In addition, the very high temperatures from nuclear reactors could be used in other hydrogen productions by producing steam for more efficient electrolysis or fossil gas-based steam methane reforming.
What is turquoise hydrogen?
This is a new entry in the hydrogen colour charts and production has yet to be proven at scale. Turquoise hydrogen is made using a process called methane pyrolysis to produce hydrogen and solid carbon. In the future, turquoise hydrogen may be valued as a low-emission hydrogen, dependent on the thermal process being powered with renewable energy and the carbon being permanently stored or used.
What is yellow hydrogen?
Yellow hydrogen is a relatively new phrase for hydrogen made through electrolysis using solar power.
What is white hydrogen?
White hydrogen is a naturally-occurring geological hydrogen found in underground deposits and created through fracking. There are no strategies to exploit this hydrogen at present.
Renewable energy sources and new-builds.
Almost a quarter of the UK’s electricity was generated by wind turbines last year, double the share of wind power in 2015 and up from a fifth of the UK’s electricity in 2019.
By contrast, electricity from gas-fired power plants fell to a five-year low of 37% of the UK’s electricity, while coal power plants made up just 2% of the electricity mix.
The report found that solar and hydro power generated 4% and 2% of the UK’s electricity respectively last year, which was unchanged compared with the year before.
What needs to be done to address climate change?
More needs to be done to increase the amount of solar generation in the UK. I have already written to government to make good on promises to mandate solar on all new builds from March 2023. If we fail to start forward planning, then reliance on fossil fuels will remain. It’s clear that solar is a viable alternative that will reduce household dependence on traditional energy sources. We should also mandate that all new builds are fitted with heat pumps in advance of the 2050 deadline. The more we do now, the better in the long-term. Retro-fitting of solar and heat pumps simply isn’t a viable alternative for most households.
