Global upheaval in energy markets has been exacerbated by the coronavirus pandemic, and by ever-changing political winds, with energy investors at times torn between finding the best returns while also considering the impact of climate change.

Many economies depend on fossil fuels, so moves away from coal-fired power and other forms of thermal generation can have large economic consequences. There also have been concerns about maintaining reliable—and resilient—supplies of electricity as baseload power sources are shuttered and retired. Governments setting carbon-neutral and other climate goals must consider the importance of providing reliable power to national, state and provincial, and local regions, while minimizing economic impacts. 

Shilpa Kokate

Several analysts who have spoken to POWER in the past year have discussed the balancing act facing investors, including many of the world’s largest banks and financial institutions, when it comes to performing fiduciary duties for their clients while at the same time pursuing environmental, social, and governance (ESG) strategies. Shilpa Kokate, Advisory Director Eastern U.S. for Hitachi ABB Power Grids, provided POWER with her insight into how energy investors can traverse an increasingly bumpy landscape.

POWER: Should investment managers be steering investors away from fossil fuel-powered projects and toward renewables? Is there still any reason to invest in a coal or natural gas project?

Kokate: Yes, natural gas will continue to act as a bridge fuel while states actively move toward realizing their decarbonization-related goals. Natural gas-fired resources will be required to help maintain reliability in the future. However, investment in coal projects comes with huge risks.

While plentiful and cheap, lower natural gas prices and stricter environmental regulations continue to erode the economics for coal plants. There were eight bankruptcies in the U.S. coal mining industry last year. A number of insurers, such as Axis Capital and Chubb in the U.S, and investors are also backing away from coal investments.

Despite high expectations surrounding carbon capture and sequestration (CCS) technology in the U.S., market dynamics and tax support, such as IRS tax breaks, haven’t translated into additional and economic investment of CCS projects. For example, nearly half of the $2.66 billion spent by the U.S. Dept. of Energy (DOE) since 2010 to develop advanced fossil energy technologies was devoted to CCS demonstration projects, nine in total. At the end of 2017, only three were active and one was at a power plant (i.e., Petra Nova) that was recently shut down.

POWER: Nuclear power is a zero-emissions resource. Debate continues about whether it should be considered a renewable resource. There are some notable people investing in nuclear energy, such as Bill Gates, but is nuclear power something that investment managers should look at as a legitimate way to solve climate change?

Kokate: That will depend on continuous regulatory support, the nuclear industry’s ability to alleviate safety and cost concerns — especially when prices of renewable resources are plummeting — and whether advance nuclear reactors live up to their promise. The recently passed energy bill (Energy Act of 2020) enshrines support for advanced nuclear reactors and authorizes an R&D program to help build a competitive fusion power industry in the U.S. Work continues as far as the development of small modular reactors (SMRs) is concerned. For example, the U.S. Nuclear Regulatory Commission (NRC) approved the final safety evaluation report for NuScale Power’s small modular reactor design in late summer 2020. Tennessee Valley Authority recently became the first U.S. utility to receive permission to potentially build and operate an SMR after the NRC’s authorization (i.e., Early Site Permit for the Clinch River site).

Note that some owner-operators of nuclear power plants in the U.S. are seeking license renewals, for example, to operate until the 2050s. This includes NextEra’s second 20-year license renewal application for its two Point Beach nuclear units in Wisconsin. The NRC is also reviewing applications for a second 20-year license renewal for the North Anna and Surry nuclear power plants in Virginia. U.S. nuclear plant licenses allow for an initial 40 years of operation, and operators of most units have already received a 20-year renewal.

POWER: Environmental, social, and corporate governance (ESG) is now a measuring stick for the sustainability and societal impact of an investment. Should ESG be considered when looking at potential investments, and to what degree—a large consideration, small, etc.?

Kokate: Yes, given recent increases in corporate engagement, shareholder action and ESG pledges by those active in the financing, advisory services and the investment community—such as Goldman Sachs’ $750 billion ESG commitment—and increasing recognition of ESG by major players in the oil and gas industry, like the British Petroleum and Shell’s commitment to net-zero carbon emissions by 2050. As long as major players continue to embrace the importance of ESG issues—for example, Principles for Responsible Investment has grown to 3,108 signatories with U.S. $103 trillion in assets under management—and ESG indices and funds outperform their peers, inflows to sustainable funds will continue. Further, voluntary disclosures are increasingly becoming mandatory and it will not be surprising to see ESG as the fifth pillar of financial regulation (e.g., refer to the European Union’s ESG regulatory measures) in the next few years. Therefore, ESG as a metric to evaluate investments will become a factor that cannot be ignored.

POWER: Bottom line—where should energy investors be directing their dollars and should climate change be a major (or minor) consideration?

Kokate: Energy investors should continue to direct their dollars to clean energy and battery storage resources that will help facilitate the energy transition. While most investors realize that a new and cost-effective zero-carbon technology will need to be developed to help realize decarbonization-related goals, they also need to understand the crucial role that natural gas will continue to play in the interim.

The science behind climate change is not new. As Naomi Oreskes, a professor at Harvard University, has written in an op-ed for CNN, the U.S. National Science Foundation and other federal agencies, like NASA, National Weather Service, and the U.S. Geological Survey, were set up to support basic scientific research and better our material condition via technical innovation. Scientists were predicting that burning fossil fuels would change our climate in dangerous ways in the 1960s, and by 1988 they were telling us that the climate was, indeed, changing. A number of nations have already ratified the Paris Agreement and are working toward achieving their climate action targets. ESG commitments will continue to shine a bright light on climate change-related concerns, help facilitate growth in the ESG investment segment, and drive the need for recognizing climate change as a major consideration for energy investors.

Darrell Proctor is associate editor for POWER (@POWERmagazine).