Glencore released a report last week ahead of its Annual General Meeting aimed at assessing the long-term implications of climate change on its business: Climate change considerations for our business 2017.
This blog briefly considers the qualities of Glencore’s disclosure and explains why the company’s explanation of energy transition risk misses the mark.
The most notable aspect of the paper is its lack of detail. Rather than transparently disclosing its exposure to the seaborne coal market and the cost profile of its assets, much of the report is dedicated to discounting the energy transition. This makes it difficult for the reader to even distinguish between thermal and metallurgical coal impacts, for example.
The paper falls well short of the standards proposed by the Task Force on Climate-related Financial Disclosure (TCFD), most notably with regards to its use of scenario analysis. Glencore provides three proprietary scenarios, including one that is aligned with the IEA’s 450 Scenario (2°C consistent). However, Glencore does little to characterize the assumptions underpinning its own scenarios, leaving little for investors to assess or compare and is seemingly at odds with the TCFD’s recommendation that companies “strive to achieve transparency around parameters, assumptions, analytical approaches, and time frames.”
Improved disclosure of the business implications of climate change is of course welcome and the development of scenario analysis is encouraging. But investors require quantification of the potential value impact upon their products, rather than its simple indication as either “positive”, “neutral”, or “negative”. Carbon Tracker has previously outlined viable options for companies.
Perhaps more alarmingly, Glencore fails to reflect structural changes to the supply and demand of thermal coal, which are now market consensus. Below are a series of statements made in the paper.
“Coal is expected to continue to be the lowest cost fuel source for large-scale baseload power generation. Coal’s relative cost advantage is the driver of current and future investment.”
In our view, this is both wrong and out-dated. As detailed in our report, End of the Load, renewable energy is on average the cheapest form of generation on a levelised cost of energy basis[i]. Indeed, as detailed in our previous blog, Here Comes the Sun, 60 GW of India’s existing coal capacity may have higher running costs than latest solar PV tariffs. Baseload power is an antiquated term, which is not relevant in future power systems[ii]. Indeed, OECD markets already provide case studies for how baseload generation declines as mid-merit generation is called upon to support increased levels of ultra-low cost variable renewable energy (VRE). Filling the variability gap with coal requires increased flexibility that often leads to expensive retrofitting and higher running costs[iii]. Demand response, power storage, grid flexibility and some gas-fired generation are likely best placed to backup VRE.
“Glencore expects investment of over 107GW, or more than 220 new coal-fired units over the next 15 years, in markets dependent on seaborne-traded thermal coal. We expect growth in the net global seaborne coal trade during the period 2015 to 2030 to be 290 million tonnes.”
In our view, this fails to reflect fundamental supply and demand changes in non-OECD Asian markets. Contrary to Glencore’s claim, the narrative around thermal coal demand in non-OECD Asia has changed from how much new coal capacity is needed to how fast existing units can be closed. China cancelled over 100 planned or under construction coal plants in January this year. The Indian government recently announced it aims to stop importing thermal coal for its state-owned power generators by 2018. Moreover, the Central Electricity Authority stated earlier this year that India does not need any more coal capacity until 2027. China is also restructuring its upstream coal activities to boost productivity and competitiveness. As detailed in our report, Chasing the Dragon, this restructuring coupled with reduced domestic demand could make China a net exporter to the seaborne market. China and India constituted 43% of total thermal seaborne import demand in 2013, undermining Glencore’s optimistic outlook.
“We believe that the realities of future global energy demand and supply will continue to support our business, fully utilising coal reserves and supporting future optional investment in resource conversion.”
The exposure of coal to fuel substitution that is likely to result from market and policy trends is real. As detailed in our report with Imperial College, London, Expect the Unexpected, there is potential for coal to be entirely phased-out by 2050. In our view, claims based on the “realities of future global energy demand and supply” need to be examined in detail. This dismissal of a low carbon future seems to be based on the energy system of the past, rather than the energy system of the future.
Matt Gray, Senior Analyst, Utilities and Power,
Tom Drew, Research and Policy Associate,
Carbon Tracker Initiative.
[ii] As grids throughout the world accommodate increased amounts of ultra-low cost VRE, mid-merit or flexible power will be needed to match supply and demand.
[iii] According to the IEA Clean Coal Centre, hot, warm and cold starting a 500 MW coal unit could cost $94,000, $116,000 and $174,000, respectively. While load cycling a 500 MW coal unit down to 180 MW could cost $13,000.