WSJ’s "Heard on the Street": Political Energy Down, Market Energy Up Post-Copenhagen (Remembering the risks of Enron’s political capitalism model)
Matthew Curtin’s Heard on the Street in the December 22nd Wall Street Journal, Green Investments Are Being Clouded by Copenhagen, caught my eye. Copenhagen not so much failed as energy reality won. The 19th century British economist W. S. Jevons would have smiled as neo-Malthusian politics fell victim to old fashioned consumerism, economic growth, free trade, and energy economics 101.
Copenhagen also brings into review the risky political capitalism model where profit-making is tied to special political favor rather than underlying consumer demand. Enron’s core business model was tied to rent-seeking, part of the problems that brought down the company in spectacular fashion.
Here is what Mr. Curtin wrote:
The Copenhagen climate summit will do little to spur further investment in environmental technologies.
That is hardly surprising given the fundamental flaw at the heart of the process: Negotiations to reduce global carbon dioxide emissions were premised on how much of the gas nations produce, rather than what they consume.
Industrializing countries feared the emissions curbs being demanded of them were a protectionist ruse by the developed world. One country’s production cuts, if achieved by reducing local CO2 emissions by relying on imports, is another country’s production increase, with no gain for the world’s climate.
The nonbinding accord cooked up by the world’s biggest industrial nations looks like the lowest common denominator you would expect from countries skeptical of each others’ motives and increasingly mistrustful of the science that predicts global warming.
For investors and business leaders, there is no extra clarity on an international regulatory framework that might help them predict the cost of CO2. Such certainty is critical for evaluating the investment merits of environmental projects to meet the emission reductions advised by the United Nations.
McKinsey has forecast such spending might amount to as much as €530 billion ($759.76 billion) a year by 2020 and €810 billion by 2030.
The price of CO2 in the European Union, which has the world’s most advanced emissions trading system, is around €14 a metric ton, less than half the level necessary to make many low-emission projects viable. The combination of the severe European recession, coupled with too generous issuance of trading permits, has undermined the perceived advantage of a market-based approach to carbon reduction over tax-based carbon pricing: that it leads to more predictable outcomes.
What is more, EU planning for the CO2 trading regime extends only to 2020, another problem when many CO2-intensive capital projects, like power stations, have far longer lives….
The next day, Liam Denning wrote in his Heard on the Street piece, Delays Out of Copenhagen Fire Up Coal:
In Copenhagen, world leaders debated climate change they didn’t quite believe in enough to overcome political obstacles. What does their lack of agreement portend for the U.S. electricity sector?
In short: more uncertainty. When and how America handles carbon emissions affects every power company’s investment decisions and valuation.
Selling even a multilateral settlement looked challenging. Legislation ahead of 2010 midterm elections now seems all but impossible. Having the Environmental Protection Agency regulate carbon emissions as pollutants instead would provoke legal challenges.
The big losers are nuclear generators like Exelon and Entergy. Nuclear plants emit no carbon. If carbon was embedded in electricity prices, as generators using fossil fuels factored it into costs, nuclear profits would benefit.
Conversely, unregulated power producers burning coal benefit from a delay. How much, depends on their regional market. Without a carbon cost, coal-fired generators selling into wholesale markets where natural gas-fired plants set the marginal price of electricity tend to earn good profit margins per megawatt-hour.
Carbon pricing would savage such margins—that’s the idea, after all. But in its absence, it might be time to reappraise Allegheny Energy, the worst-performing S&P Utilities constituent this year. As Morgan Stanley points out, its unregulated generation portfolio is mainly coal-fired, operating where gas-fired competitors set prices. At 11 times 2009 earnings versus a sector average of 13.4 times, Allegheny appears priced for change that Copenhagen didn’t deliver.
The Wall Street Journal’s Heard on the Street page is not about politics. It is about technical, business, and political realities to inform investors to make money. Not much spin, in other words. And the word is in: consumer-driven energies are sustainable, not political energies that rest on shaky technology and fickle public policy.
The long run still belongs to oil, gas, and coal.