Investment Implications of Climate Change

1
Investment Implications of Climate Change
CIPFA Conference 13 March 2008
John Granholm Senior Portfolio Manager
2
What Were Not Going to Talk About Scientific
Arcana
Delete for book
Source Research Revolution 2002
3
What We Are Going to Talk About Investment
Implications

• There will be a massive global effort to reduce
  emissions of greenhouse gases
• We estimate that annual capex in power generation
  alone will double by 2020
• 190 billionwithout effort to reduce emissions
• 400 billionwith effort to reduce emissions
• Primary beneficiaries
• Power-generating equipment makers
• Certain utilities

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Investment Implications (continued)

• Other segments will gain from carbon-restriction
  efforts
• Electricity transmission equipment
• Power semiconductors
• Hybrid vehicle manufacturers
• But
• Consumers will pay more for electricity
• Big industrial consumers of electricity will feel
  margin squeeze

• Pipeline operators
• Oil field services
• Engineering construction firms

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Atmospheric CO2 May Soon Reach Critical Level
Temperature Change(Degrees Celsius, 0Present)
Atmospheric Concentration (ppm CO2)
380
298
287
284
280
Temperature Changes
Year2030
Years ago
Years ago
Years ago
Years ago
Years ago
Source Arctic and Antarctic Research Institute,
Laboratoire de Glaciologie et de Géophysique de
l'Environnement and Laboratoire des Sciences du
Climat et de l'Environment
6
Early EffectsMelting of Summer Ice Sheet Much
Greater in Greenland
2002
1992
Source Arctic Climate Impact Assessment 2004
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Kilimanjaros Ice Cap Is Shrinking
Recent
15 Years Ago
Getty Images
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We Focused on the Central Problems CO2 and
Electricity
Man-made Greenhouse Gas Emissions (2006E)
CO2 Emissions Sources (2006E)
Industrial Processes4
Halocarbons
Residential Other Fuel Combustion 13
Methane15
Transportation 21
Electricity Cogeneration36
CO2 74
Manufacturing Construction 26
40.4 Gigatonnes CO2 Equivalent
30.0 Gigatonnes CO2
Estimated from 2000 anchor data Estimated from
2003 anchor data Non-CO2 emissions are expressed
in CO2 equivalents using 100-year global warming
potentials found in the IPCC Second Assessment
Report Source EIA, International Energy Agency
(IEA), Intergovernmental Panel on Climate Change
(IPCC), World Resources Institute and
AllianceBernstein
9
Most Emissions Come from Relatively Few Sources

• In 2005, 150 stationary sources emitted as much
  CO2 as the global car fleet

150
Source IEA and AllianceBernstein
10
Most Emissions Come from Relatively Few Sources
Megatonnes CO2

• In 2005, 150 stationary sources emitted as much
  CO2 as the global car fleet
• The largest 1,000 stationary sources account for
  30 of global CO2 emissions
• 260 are in the US and 240 are in China
• 875 are power-generating plants

60
50
40
30
20
10
0
150
1000
Source IEA and AllianceBernstein
11
Most Emissions Come from Relatively Few Sources
Megatonnes CO2

• In 2005, 150 stationary sources emitted as much
  CO2 as the global car fleet
• The largest 1,000 stationary sources account for
  30 of global CO2 emissions
• 260 are in the US and 240 are in China
• 875 are power-generating plants
• Fewer than 8,000 stationary sources emit 50 of
  man-made CO2

60
50
40
30
20
10
0
150
2000
1000
Source IEA and AllianceBernstein
12
Stationary Sources of CO2 Are Geographically
Concentrated
Red
Power plants All other sources
Green
Sized relative to yearly emissions Source IEA,
NASA, TerraChart and AllianceBernstein
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What Are the Abatement Options?
Implementation Obstacles
Impact on Users
Cost
Reduce global energy consumption
Delete for book
Technical and political Source AllianceBernstein
14
What Are the Abatement Options?
Implementation Obstacles
Impact on Users
Cost
Reduce global energy consumption Increase natural
CO2 absorption
Delete for book
Technical and political Source AllianceBernstein
15
What Are the Abatement Options?
Implementation Obstacles
Impact on Users
Cost
Reduce global energy consumption Increase natural
CO2 absorption Switch to renewables and nuclear
Technical and political Source AllianceBernstein
16
Nuclear Energy Capacity Will Rise Substantially
Gigawatts of Global Capacity
2006
2030E
Based on MITs The Future of Nuclear Power,
2003, high-growth case, interpolating via CAGR
between 2000 and 2050 anchor years
Source EIA, International Atomic Energy Agency
(IAEA), Massachusetts Institute of Technology
(MIT) and AllianceBernstein
17
Leading to Much Higher Annual Spending
Global Nuclear Energy Capex Billions
Incremental
Business as Usual
Source EIA and AllianceBernstein
18
Nuclear Power Will Supply Significant Baseload
Power
Share of Global Power Generation
Renewables
Natural Gas
2.6 trl kWh
7.3 trl kWh
2006 Total 17.7 trillion kWh
2030E Total 29.9 trillion kWh
Source EIA and AllianceBernstein
19
Renewable Energy Capacity Will Surge
Gigawatts of Global Capacity
2,365
Wind, solar and other
1,150
1,024
Hydro
2006
2030E
Source EIA, IEA and AllianceBernstein
20
But Renewables Have Significant Obstacles
Source AllianceBernstein
21
Despite Substantial Investment in Renewable
Energy
Global Renewable Energy Capex Billions
Incremental
Business as Usual
Source EIA and AllianceBernstein
22
Renewables Will Gain Only a Bit More Market Share
Share of Global Power Generation
Renewables
Renewables
Natural Gas
3.3 trl kWh
6.4 trl kWh
2006 Total 17.7 trillion kWh
2030E Total 29.9 trillion kWh
Source EIA and AllianceBernstein
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What Are the Abatement Options?
Implementation Obstacles
Impact on Users
Cost
Reduce global energy consumption Increase natural
CO2 absorption Switch to nuclear and
renewables Capture fossil fuel emissions
Technical and political Source AllianceBernstein
24
Coal Is Consistently Cheaper
Energy Equivalent Cost 2007 Dollars
(/mm btu)
Oil
Natural Gas
Coal
Source Bloomberg, BP Statistical Review of World
Energy 2006 and AllianceBernstein
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Coal Is Consistently Cheaper and Widely Available
Energy Equivalent Cost 2007 Dollars
Ratio of Global Reserves to ProductionNumber of
Years
(/mm btu)
Oil
Natural Gas
Coal
Source Bloomberg, BP Statistical Review of World
Energy 2006 and AllianceBernstein
26
Particularly in Key Regions
Proven Reserves of Fossil Fuels
Gas
21
Oil
21
Coal
58
Energy equivalent basis Source BP Statistical
Review of World Energy 2006
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The Problem with Coal High Carbon Emissions
CO2 EmissionsTonnes per Megawatt Hour
Source EIA and AllianceBernstein
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Q How Can We Reduce Coal Plants Carbon
Emissions?

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Q How Can We Reduce Coal Plants Carbon
Emissions?

• A

Delete for book
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Q How Can We Reduce Coal Plants Carbon
Emissions?

• A Retrofit existing facilities to capture CO2
  after combustion
• Leverages sunk cost but still very expensive
• Technology choices
• Adding chilled ammonia to flue gas
• Not practical today
• Adds 4.5 to cost per kilowatt hour of
  electricity
• Blowing oxygen, rather than air, into flue gas
• Promising
• Adds 3.5 to cost per kilowatt hour of electricity

Note Average US retail price 2006 8.5 per
kilowatt hour
Source EIA, MIT and The Future of Coal, 2007
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Q How Can We Reduce Coal Plants Carbon
Emissions?

• A Build new plants using clean technology
• Technology choices
• Gasifying coal to capture carbon before
  combustion (IGCC)
• Promising, but not yet tested in scale
• Adds 1.4 to cost of electricity per kilowatt
  hour

Note Average US retail price in 2006 8.5 per
kilowatt hour
Source EIA, MIT and The Future of Coal, 2007
32
There Will Be a Huge New Opportunity in
Cleaning Coal
Global Coal Energy Capex Billions
Incremental
Business as Usual
Source EIA and AllianceBernstein
33
Coal Will Continue to Anchor the Power Fleet
Share of Global Power Generation
Renewables
Natural Gas
11.6 tn kWh
Coal
7.3 tn kWh
2006 Total 17.7 trillion kWh
2030E Total 29.9 trillion kWh
Source EIA and AllianceBernstein
34
Yet CO2 Emissions from Coal Plants Will Drop 50
Share of Global Power Generation
Renewables
Natural Gas
11.6 tn kWh
Coal
7.3 tn kWh
2030E CO2 Emissions from Coal 4.0 Gigatonnes
2006 CO2 Emissions from Coal Power 7.9 Gigatonnes
Source EIA and AllianceBernstein
35
CO2 Transport and Storage Will Be a Large New
Market
CO2 Transported and Injected Billion Cubic Feet
Per Day
Current natural gas transported volume
Source IEA and AllianceBernstein
36
CO2 Reduction Will Add Massively to Spending on
Power
Capex on Power Generation Infrastructure
Billions
Incremental
Business as Usual
Source EIA and AllianceBernstein
37
Incremental Spending Will Be Huge for Coal and
Nuclear
Incremental Power Generation Capex Billions
Gas
Renewables
Nuclear
Coal
Source EIA and AllianceBernstein
38
Energy Efficiency Is Both a Strategy and a Result
Implementation Obstacles
Impact on Users
Cost
Reduce global energy consumption Increase natural
CO2 absorption Switch to nuclear and
renewables Capture fossil fuel emissions Improve
energy efficiency
Technical and political Source AllianceBernstein
39
Efficiency is Fastest and Cheapest CO2 Reduction
Strategy
California Traffic Light Case Study
Note Assumes 1 MWh of electric generation
produces 0.6 metric tons of C02 emissions in the
state of California, wind capacity needed is
electric demand in MWh over 0.3 times 365 and 24,
and recurring electric costs of supplying 186 GWh
per year for three years is present valued at a
discount rate of 10. Source AllianceBernstein
and California Energy Commission.
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Price of Electricity Tends to Drive Efficiency
(GNP/kWh)
High Efficiency
Denmark
UK
Japan
US
Belgium
Norway
India
China
Low Efficiency
High Price
Low Price
(/kWh)
Data from 2000 Source EIA, World Bank and
AllianceBernstein
41
Regulation Can Also Drive Efficiency
(MWh)
Electricity Consumption per Capita
United States
California
Western Europe
Source California Energy Commission, California
Public Utilities Commission, European Union and
US Department of Energy
42
Emissions Control Efforts Likely to Make Big
Difference
Annual CO2 Emissions Gigatonnes
Fuel Mix Shift
Industry Other
CO2 Capture Power
Transportation Including Hybrids
42.9
42.9
(3.6)
30.0
(6.6)
25.8
(3.7)
(3.2)
AB Forecast w/Emissions Abatements
2030E Business as Usual
Estimated from 2003 data Includes some CO2
capture Only reflects decline in emissions
from increased fuel economy Source
AllianceBernstein, EIA, ORNL, IEA and World
Resources Institute
43
CO2 Emissions and Atmospheric Concentration Will
Keep Rising All Century, If Nothing Is Done
Gigatonnes CO2
ppm
Atmospheric CO2
CO2 Emissions
CO2 Emissions
Our business-as-usual scenario through
2100 Source EIA, IEA and AllianceBernstein
44
Emissions and Atmospheric Concentration Will Fall
Significantly This Century, If Humankind Acts
Gigatonnes CO2
ppm
Atmospheric CO2
CO2 Emissions
AllianceBernstein Emissions Abatement Scenario
through 2100 Source EIA, IEA and
AllianceBernstein
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Investment Implications The Major Winners
NearTerm
MidTerm
LongTerm
Generating Equipment Transmission
Equipment Electric Utilities / -
/ -- / -- Oil Field Services / -
/ -- / -- Pipeline Operators
Engineering Construction Firms
Power Electronics
Near term defined as lt5 years, midterm as 58
years and long term as gt8 years Source
AllianceBernstein