Buckley: Delayed Shift Out of Fossil Fuels Could Leave $20 Trillion in Stranded Assets

Investors and financiers will find themselves confronted with up to US$20 trillion in stranded fossil energy assets by 2050 unless they embrace the shift to clean energy, warns Tim Buckley, director of energy finance studies with the Institute for Energy Economics and Financial Analysis (IEEFA), in a recent summary of a podcast he recorded last month.

“I’d rather financial markets learn that today, and not in 10 to 15 years,” Buckley said. “$20 trillion is too big. It could destroy the global financial system. It can be almost entirely avoided with planning and transitioning and can start now by putting an explicit price on the key externality—carbon emissions.”

Citing similar concerns raised by Bank of England Governor Mark Carney, Buckley pointed to solar, wind, electric vehicles, and lithium-ion batteries as technologies that are disrupting global energy and transportation markets.

“They do more damage to the competitor than they create value for their shareholders,” and “we are grappling with that right now in Australia,” he said. “When solar generation is full-on in the middle of the day in South Australia, prices of electricity go negative, and it destroys the value of the incumbent industry, regardless of whether it makes an effective return to the solar investor once built. It doesn’t make a return to its shareholders unless they have a 25-year power purchase agreement.”

But “well before you make a viable return on your solar project, you destroy the viability of an inflexible, outdated, 24/7 base load coal plant, because for eight to 10 hours of the day, a base load coal-fired power plant is unviable.”

He added that “ that’s why we’ve seen 10 coal plant closures in the last 10 years in Australia. New coal plant builds are not economically viable nor bankable. Solar is a really disruptive force. So that’s the negative, that’s the risk,” for legacy fossil energy production.

But the same forces that present an existential threat to fossil energy “can be ‘gold’ to someone who owns a battery, or pumped hydro storage, or who owns a gas peaker (gas plants that are only turned on when electricity demand is at its highest), because the price of wholesale electricity becomes more variable,” he added. Even if that price goes very low more often, “it will then also go positive $14,000 at night when the sun’s not shining, or the wind’s not blowing.” And “that provides the financial incentive for a massive—tens of billions of dollars—amount of new investment in pumped hydro storage, solar thermal, grid connectivity, lithium-ion batteries, and demand response management.”