This week's guest Top 5 - Energy transition and investment trends

Nirmal Nair on the depth of energy stocks in NZX, Norway's wealth fund and renewables, Saudi Arabia's Aramco IPO delay, Royal Dutch Shell's electric aspirations and the top global power companies

7th Jun 19, 10:00am by Guest

This week’s Top 5 comes from Nirmal Nair, Associate Professor, Electrical & Computer Engineering at The University of Auckland.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

For this Top 5 column I have identified recent trends in energy investment that will potentially impact the way investment trends develop in capital and stock bourse offerings globally. In my Top 10 column from 2018 some of the trends, new energy developments and challenges were identified. This column is primarily to seek comments from readers on what their thoughts are on the future of energy investing and financials during a zero-carbon transition economy.

1. Closer to home first: The depth of energy stocks in the NZX.

The current market capitalisation of the NZ Stock Exchange is about $144.895 billion. The electricity energy companies of Contact, Genesis, Mercury, Meridian, Trustpower and recently Tilt Renewable accounts for $27.941 billion (19.28%). If one includes other energy stocks like Vector and Z Energy, it clocks $33.935 billion (23.4%). In coming years as the global investment shift happens as identified in the subsequent items of this Top 5, is it likely to see any change to this picture? Will future governments decide to float some portion of the remaining 51% in its books to support well-being budgets? Open questions for another day..

2. Norway’s wealth fund pivoting its investment to renewable energy.

Norway is an energy-rich (oil) country that has invested over the years its wealth into a sovereign wealth fund which is currently capitalized at around $1 trillion. It will invest about 14 billion into non-listed renewable projects across the world.

In parallel, it is starting to slowly divest its oil and gas assets from its wealth fund portfolio. Norway’s internal energy consumption is supplied mainly through its hydro generation which ensures it energy security.

3. Saudi Arabia’s Aramco stock and IPO plans.

Aramco’s journey towards the capital and financial markets started with a $10 billion debt sale that attracted 10 fold interest worth $100 billion from global bond holders. This success and the Kingdom’s role in the Khasogi killing is likely to delay its public IPO offer. For energy security and transitioning off from carbon sources to fuel its own economy, Saudi is looking toward nuclear energy and a recent announcement appears to be this pivot.

4. Royal Dutch Shell Oil & Gas group’s aspiration of becoming the world’s largest electricity company.

Factoring the carbon charge liabilities that Royal Dutch Shell anticipates it will have to account for by 2035, its investment in renewable energy companies starting in 2020 is in the order of 1-2 billion per year ramping up as the carbon market picks up.

5. The 2018 Top 10 global power companies.

As countries will so oil/gas companies across the world will look to transition into the future of a low-carbon economy. This is likely to involve investment through capital markets, sovereign funds and also through financial bourses in utility companies. This brings into focus the existing top 10 global power companies based on revenue, as below.

10. E.ON $36.93bn

9. Siemens $38.42bn

8. General Electric Co $38.5bn

7. Iberdrola $39.79bn

6. Engie $48.8bn

5. KEPCO $53.5bn

4. TEPCO $55.36bn

3. EDF $77.8bn

2. Enel $85.28bn

1. State Grid Corporation of China $347bn

Apart from Siemens and GE, all others are state-owned utility companies. Thus, in the race towards a low-carbon market it is likely that all the investment mechanisms will be active to strategize big transitions and we are very likely to see some interesting transactions, investments, mergers etc. How much of this translates to retail investors is still unknown.

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14 Comments

by Withay | 7th Jun 19, 10:57am 1559861821

“Norway is an energy-rich (oil) country that has invested over the years its wealth into a sovereign wealth fund which is currently capitalized at around $1 trillion. It will invest about 14 billion into non-listed renewable projects across the world.”
What an appalling way to go about things. Everyone knows you should end the extraction and production of oil to send a signal to the rest of the world instead of use royalties to invest in renewables! What on earth are they thinking?!

by ham n eggs | 7th Jun 19, 11:53am 1559865209

A slight problem though. You cant GROW into an low carbon economy ... you can only COLLAPSE into one.

by ham n eggs | 7th Jun 19, 11:54am 1559865294

"Norway’s internal energy consumption is supplied mainly through its hydro generation which ensures it energy security. "

LOL
Are you saying they only consume electricity?
Wow.

by waymad | 7th Jun 19, 7:21pm 1559892075

The main comment I can usefully make is that NZ has a uniquely renewable position, thanks to the Think Big Hydro investments from the 1950's onwards, plus the Gaia-cooling use of geothermal, and a tiny fraction of Wind (when Gaia decides to exhale). For the actual near-real-time position, see Transpower here. Compare this (and don't get too smug) with the dreadful example of Oz, dependent for its absolute 18Gw baseload on the reliable dispatchables of coal (ranging from brown to black), diesel, gas and hydro. Oz coal plants have no HELE technology, so are low efficiency.

If/when Tiwai is discontinued, the 17% of electrons currently (sorry) getting Al all excited, will happily power our vehicle fleet provided someone somewhere gets EV'ed A- and B-trains commercialised. Because, and to the great disgust of True Believers, there just isn't a rail spur line to every shopping mall in the land. Or even to every large town....

Or else, just to be not-quite-frivolous, ex-Tiwai electrons could easily be diverted to a few big electric draglines around Waimumu, to produce lignite from the 300+ year supply under Southland and Otago, to then turn into liquid fuels, to ease us all through the transition using otherwise stranded assets. But that's dependent on a much more rational (or at least less apocalyptic) attitude amongst decision-makers.

So perhaps little hope there.....but that lignite ain't going away, either.

Edit addition: Lignite - the Secret Sauce behind Germany's Energiewende.....35.2% of their electricity, no less....from hard coal and lignite

by powerdownkiwi | 7th Jun 19, 3:59pm 1559879955

The problem is that by the time you get down to the EROEI of lignite, you ain't got an economy.

http://euanmearns.com/eroei-for-beginners/

https://dothemath.ucsd.edu/2011/10/the-energy-trap/

by profile | 8th Jun 19, 4:57pm 1559969862

What problem? The answer is in the first paragraph - "In today’s energy mix, hydroelectric power ± nuclear power have values > 50."
http://euanmearns.com/eroei-for-beginners/
Or in your second link: "When France decided to go big on nuclear, they built 56 reactors in 15 years."

" -Had Germany spent $580 billion on nuclear instead of renewables, and the fossil plant upgrades and grid expansions they require, it would have had enough energy to both replace all fossil fuels and biomass in its electricity sector and replace all of the petroleum it uses for cars and light trucks.

-Had California spent an estimated $100 billion on nuclear instead of on wind and solar, it would have had enough energy to replace all fossil fuels in its in-state electricity mix."
https://www.forbes.com/sites/michaelshellenberger/2018/09/11/had-they-b…

by KH | 8th Jun 19, 8:57am 1559941078

Big picture for New Zealand is electricity for everything. Yep- everything. Including production of hydrogen for some big machinery.
The political objective to achieve is for locals to retain ownership and control of it all, especially the grid.
Worse case would be big corps control it and suck out the cash.
So. Get them panels on the shed and with your mates put that mill on your hill. Make your politicians ensure markets, ownership and control work for locals.
The Blueskin project is very illustrative of ways forward.

by Brendon | 9th Jun 19, 8:42am 1560026534

I agree. The first step to achieving that would be to solve the periodic seasonal low lake level problem for the hydro lakes. Pumped hydro as a grid-scale battery could do that.

I discuss that here https://talkingtransport.com/2019/01/30/are-we-there-yet-hydrogen-train…

If the North Island replaced its fossil burning generation with renewable sources -wind, solar etc then it would need some local grid scale batteries to provide cover for the daily/weekly variation in generation capacity i.e. when the wind isn't blowing or the sun shining.

This is all quite doable. New Zealand is lucky.

by powerdownkiwi | 9th Jun 19, 9:45am 1560030331

I don't think we will do hydrogen, The infrastructure is 'greenfields', and has huge tech issues.

Pumped storage, on the other hand, is scalable, low-tech and do-able in a post-crash world. And I reckon biodiesel can drive existing motors/tractors/trucks where needed, grown where dairy retreats.

Public transport and light rail are high on the list - but we have to remember that what we think of as 'work' will be entirely different, and the demand to get places may be much lower.

by Brendon | 9th Jun 19, 10:02am 1560031358

Interesting viewpoint as always PDK. What is your take on the Onslow-Manorburn pumped hydro scheme? It is down your end of the country, isn't it? What would the locals think?

by powerdownkiwi | 9th Jun 19, 12:55pm 1560041715

I think we have to have an honest discussion re Nimbyism and environmentalism versus the need to power society in some cohesive fashion. And I think we have to accept altered landscapes 'somewhere', so why not there? Looks like someone did some homework - wonder if it was in anticipation of the Hayes wind-farm and it's inevitable intermittency?

But pumped hydro is scalable - I'd do it with my existing micro-hydro if I coundn't get batteries, using wind to do the uphill pumping.

by Brendon | 9th Jun 19, 1:09pm 1560042593

It would be a service to NZ if Otago could agree it is ok to build a big pumped hydro scheme.

by powerdownkiwi | 9th Jun 19, 1:35pm 1560044108

Why not make Remuera a pond and pump seawater from Bucklands Beach?

Biggest productivity-gain going, surely?

by EarlBardsley | 14th Jun 19, 8:57pm 1560502638

Otago pumped storage need not be totally huge to be useful, and the potential is also there for the creation on an environmental asset.

https://newzealand.water.blog