8 july 2019

Big oil, coal to feel heat as investors get serious on climate

Bloomberg Intelligence July 08, 2019

This analysis is by Bloomberg Intelligence analyst Elchin Mammadov and contributing analysts Eric Kane and Charles Graham. It appeared first on the Bloomberg Terminal

Higher costs may lie ahead for the oil, coal and gas industries as large institutional investors and insurers grow wary of their climate impact. Higher costs of capital and rising insurance premiums could become the new normal as attitudes shift. RWE, Glencore and others already face the prospect of climate-driven capital flight as investors such as Norges Bank adopt restrictions on their fossil-fuel investments. Their more diversified peers may sidestep such a blow pending the tightening of numerous loopholes. This could eventually free up capital for utilities focused on developing renewables, energy efficiency, recycling and other climate-related projects.

Uniper, RWE May Face Higher Capital Costs Amid Coal Cutbacks

Utilities with high exposure to coal-fired power generation and nuclear may face a higher cost of capital as investment funds increasingly seek to divest their holdings in such companies. At the same time, insurance companies are also increasingly restricting underwriting of coal-related projects.

Coal power’s outlook dims on divestment, insurance headwinds
Coal-fired power station owners and operators may be forced to contend with a higher cost of capital, as some funds are mulling restrictions on coal investments. Norges Bank, Norway’s sovereign wealth fund, is taking steps to impose a 10-gigawatt cap on its coal-fired power generation holdings, which could force divestiture of its stakes in RWE, Uniper and Enel, which account for 1-3% of those utilities’ share capital. Insurance companies such as Swiss Re, Zurich, AXA, and Allianz are also taking steps to restrict coal-project underwriting — especially for new projects — which may hamper the coal industry with higher insurance costs.

Engie, Enel, Ibedrola won’t be impacted by Germany’s atomic sale

The plan by the German policymakers to sell government stakes in nuclear generators is unlikely to be an overhang for utilities. Germany seeks to sell stakes worth about 300 million euros in companies this summer, including shares in Engie, Enel and Iberdrola, Der Spiegel reported. As this sum represents just 0.2% of the combined market capitalization of the three companies, it shouldn’t be an overhang. From an ESG perspective, Germany’s move is strange given all three utilities are moving away from nuclear and coal, while significantly expanding their renewable-generation capacity.

Oil, coal may persevere despite investors’ climate concerns

Institutional investors and insurance companies are likely to keep scaling back their fossil-fuel exposure as climate concerns proliferate. Yet a plethora of loopholes may blunt or delay the short-term impact on coal miners and other fossil-fuel energy producers.

Fossil-fuel divestment, renewables shift will take time

The Norwegian government’s sovereign wealth fund is setting the pace in curtailing fossil-fuel energy investment, yet progress is likely to be slow. A watered down divestment plan would allow Norges Bank to retain its investments in energy majors such as Exxon Mobil, Chevron, BP and Shell. The fund’s positons in these companies has risen of late, and its stakes in fossil-fuel producers is higher than in renewable energy companies such as Verbund and EDP Renovaveis, according to Bloomberg data.

Norges Bank owns a higher proportion of share capital of coal and gas-fired generators RWE and Uniper, and a relatively low proportion of renewable generators Orsted, Verbund and EDP Renovaveis. Even within network companies, the fund has a higher stake in gas grids than in power grids.

Norway’s push may convince other investors to act

New restrictions on coal investment at Norway’s sovereign wealth fund may prompt other institutional investors and insurers to follow suit. A chain reaction could fuel a higher cost of capital and rising insurance premiums for companies engaged in coal-related exploration, production, and power generation. Mitsubishi UFJ has already halted financing for new coal-fired power plants.

Exceptions in Mitsubishi UFJ’s policy will allow for continued funding of new, high efficiency coal-power stations, and also those adopting carbon capture and storage technology. Institutional investors remain focused on divesting coal and oil interests, yet restrictions may eventually expand to include natural gas.
Table about Norges Bank Holdings Market Value ($) Position (%)

Loopholes may limit impact on insurance premiums

Swiss Re, Axa, Allianz and all other major European insurers — except Lloyd’s of London — have curtained or halted underwriting for coal mines and coal-fired power plants. The broader insurance industry has also restricted coal investment, yet loopholes may limit the impact on premiums. Some insurers’ restrictions are limited to pure-play coal miners and coal-power generators, and give a pass to diversified companies with large coal operations. Some insurers selectively restrict underwriting to certain projects (e.g. lignite, but not hard coal), or exclude specific types of insurance (e.g. reinsurance) and assets managed on behalf of third parties.

Utilities can gain from oil, coal shake-up on renewables shift
Most listed EU utilities stand to gain as financial institutions distance themselves from fossil fuel interests, in our view. Coal- and gas-heavy utilities may lose some shareholders, yet the industry stands to benefit from investors’ growing appetite for renewables, which the utilites build, sell and operate.

Coal, oil divestments may deliver boost to wind, solar

Norges Bank, Japan’s Government Pension Investment Fund, and Teachers Insurance and Annuity Association of America own higher stakes in thermal-power generator RWE than in wind-farm developer Orsted. This could change amid the growing ranks of institutional investors scaling back their fossil-fuel investments. Norway’s new plan may force Norges Bank to sell its stake in RWE, yet may allow investment in unlisted enterprises that promote renewable energy infrastructure. More than 1,000 institutions with managed investments of around $8 trillion have pledged to completely or partially divest their fossil fuel stakes, according to the climate advocacy group

Utilities can gain from coal’s fading investment appeal

Most listed European utilities stand to gain as institutional investors distance themselves from fossil-fuel interests, in our view. The divestment push could impact valuations of generators that rely heavily on fossil fuels, yet it’s unlikely to significantly reduce the value of thermal power plants — which the likes of EDP and PPC seek to sell — as investors’ appetite for such assets is already on the wane.
Institutional investors’ growing push for renewable assets should help Orsted, Iberdrola, EDP, SSE, Enel and other utilities that promote cash flow and reduce risk by selling stakes in renewables to financial institutions.

The followingcharts and tables can be seen on the original aricle at Bloomberg News

*Chart about Installed Power Generation Capacity (Megawatts)

*Chart about Market Capitalization (billion euros

*Table about Norges Bank Holdings Market Value ($) Position (%)

*Table about Europe Insurers Tougher on Coal Than U.S., Asia

*Charts about Fossil Fuel Divestment's Popularity Grows

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