Public Pressure / Reputation: Laggard companies could see their brands damaged and have difficulty competing for human capital.
Competitive Pressure: Direct competitors and other large companies lead the renewables industry.
ExxonMobil:
"ExxonMobil has completed its annual energy outlook including the impact of renewables on worldwide energy supply. Our conclusions are consistent with other forecasts like that of the International Energy Agency."
RESPONSE:
Status quo projections tend to be based on historical trends and rarely capture technological changes stemming from future events. For instance, consider the rapid emergence of personal computers and the relatively short period of time they needed to overtake mainframe computers. Renewable technologies, particularly solar photovoltaics, which are not limited by conventional energy infrastructure, have the potential to grow quite rapidly.
In addition, past growth rates do not necessarily reflect future growth rates because they do not take into account potential regulatory developments. One concern with ExxonMobil’s failure to explore renewables is that renewable energy mandates in the Europe, the United States and elsewhere are increasing in response to growing certainty about climate change. This is the regulatory pressure of which the renewable energy resolution speaks, and it is leading to the competitive pressure and public pressure referenced as well.
Fifteen countries in Europe (where ExxonMobil gets 26% of downstream revenues) have binding renewable energy goals.
In the United States, which has yet to take federal action, the number of states with renewable energy mandates is growing. Thirteen states have set binding targets and another three have non-binding goals. In addition, New York’s Governor Pataki has announced a 25% goal and three other states (Colorado, Illinois and Vermont) have goals in development. Some U.S. cities have set their own targets, including Chicago and San Francisco – and in San Francisco’s case the city has put up the money to develop renewables.
Economic benefits of renewable energy:
Renewables carry a number of positive economic benefits which make them attractive choices as governments seek to meet the goals of providing cheap, reliable energy while not creating further problems from unsustainable and damaging energy sources.
- Continuing cost reductions occur through increasing scale of manufacturing and deployment
- Costs are not affected by swings in fossil fuel prices
- Modularity, low operating costs
- Installation of distributed generation (electric generators, typically natural gas fired or solar photovoltaic) located near the load the serve) units helps reduce pressure to build new power grid generating capacity and transmission lines
- Very short construction times give much greater flexibility in energy planning and investment
- Local employment and income generation result from manufacturing, project development, servicing, and utilization
Source: G8 Renewable Energy Task Force Final Report July, 2001
http://www.renewabletaskforce.org/pdf/G8_report.pdf
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If ExxonMobil is relying on information that does not take these developments into account, that could explain its complacency on the issue – and highlight the fact that the company is failing to prepare itself adequately.
ExxonMobil:
"Wind and solar power currently provide only about 0.1 percent of global energy supply. Based on our extensive research and analysis of future energy supply, we project these sources of energy to remain less than one percent of supply in 2020 (even assuming double-digit growth). Fossil fuels are projected to supply over 80 percent of all energy demand."
RESPONSE:
ExxonMobil underestimates the potential for renewable energy to meet global energy needs.
The fundamentals of renewable energy technologies – that they are emissions-free, sustainable, carry low price risk, and are popular with the public – combined with observed annual growth rates of 25-30% range for both solar photovoltaics and wind power, suggest these emerging technologies can realistically grow in world significance rapidly.
While growth rates may change in the future, if the pattern in wind development were to hold at 30% growth, it would achieve more than 20 mboe/d (million barrels of oil equivalent per day) on an electric basis, which is about 7% of projected worldwide energy demand in 2020. As noted earlier, other estimates put this projection higher – as much as 10% by 2020.
If growth in solar photovoltaics were to stay below 30% per year, PV would not achieve major significance in the world energy supply by 2020.
However, due to the unconventional nature of PV – a semiconductor based technology that more closely resembles components of the computer industry than conventional power plants -- substantially higher growth is conceivable. The trend in growth in PV shipments has been increasing over the years and is now approaching 30%.
In sum, if there is no change to the growth of wind power, and if solar power fails to increase in significance, renewable energy will still comprise 7% of world energy demand by 2020 – more than seven times ExxonMobil’s estimate.
ExxonMobil:
"Recognizing that energy demand is expected to rise, the industry needs to invest hundreds of billions of dollars over the next decade to meet future energy requirements. We believe the challenge to ExxonMobil and society is to provide reliable, affordable energy, and that it will, in large measure, come from the development of oil and gas resources."
RESPONSE:
The hundreds of billions of dollars needed for energy investments are what become vulnerable in the case of increasingly stringent climate policies. What happens to these investments if mid-way through their life they become subject to carbon prices?
Already the first prices on carbon are in place. "European companies will have to pay 40 Euros per ton of CO2 emitted until 2007 and a 100-Euro penalty, starting from 2008, if their GHG emissions exceed their allowance. As it stands, sectors facing emissions restrictions would cover power generation (including on-site co-generators of heat and power) and the metals and minerals, glass, concrete and paper and pulp sectors… emissions. It is possible that the chemicals and aluminum industries will be drawn in before the scheme is due to start in 2005."
Thus as early as 2005, oil and gas sector co-generation facilities and chemical plants may be part of a carbon regulating policy that imposes a price on carbon. Even if the ExxonMobil’s vulnerability is delayed, it is only likely to be so for a short time: According to Swiss Re, one of the world’s largest reinsurance companies, "One thing is clear: the unrestricted right to emit greenhouse gases at no cost is fast disappearing."
Since carbon prices are becoming increasingly real, any future factor for carbon other than zero will change the economic foundations of investments made today. At least two of ExxonMobil’s competitors are responding to carbon pricing by incorporating shadow costs on carbon emissions into their scenario planning. This hedges the risk by lessening the chance that a project will turn out to be uneconomic if it is faced with a sudden carbon price mid-way through its lifespan.
- Shell: "Shell has been incorporating carbon costs in all its major projects since 2000. Today, most new investment projects, irrespective of size, must be designed for optimal profitability in a carbon-constrained world."
- ChevronTexaco: "We are incorporating greenhouse gas emission assessments into our capital project evaluations." The company has said it assumes a carbon cost of $5-$20/ton, depending on location, when evaluating potential investment opportunities.
- The World Bank incorporates climate change into its planning scenarios and has examined how to incorporate shadow carbon pricing into its project evaluations.
ExxonMobil:
"The use of current renewables technologies is not free from impact on the environment. Wind power faces challenges because of the impact of turbines on wildlife, as well as its inherent sight and sound implications, while large-scale solar power poses significant land-use issues."
RESPONSE:
It is true that all energy technologies have the potential for negative impacts on the environment. In general, however, the extraction, transportation and use of fossil fuels have substantially more negative environmental impacts than do solar and wind technologies. That is why many environmental groups support expanded use of renewable energy technologies while environmental groups generally oppose expanded use of fossil fuels.
With regard to wind power, ExxonMobil appears to be referring to avian mortalities from wind turbines that dampened enthusiasm for the energy source in the 1980’s. Early wind farms were placed in what turned out to be areas of very high bird use and used lattice towers that made attractive nesting areas.
Today, a site evaluation for avian effects is standard practice before a wind farm is built, and wind turbine towers are now sheer steel skins with no place to nest. The National Audobon Society said in a November 3, 1999 press release supporting wind energy "Wind power is a clean, nonpolluting source of electricity, producing no acid rain, oil spills, or radioactive waste."
As for sight and sound, many communities claim wind turbines are a tourist attraction. Oil-rich Big Spring, Texas, put its new wind farm on the cover of the local telephone book. Regarding noise, modern wind turbines are generally quieter than an oil well pump jack.
With regard to solar power, a great advantage of solar technology is that it requires NO land. Because of its great flexibility, lack of moving parts and noise, photovoltaics are most commonly integrated into the "built environment". That means they are located on buildings, over parking lots, or on the loads they serve. Such distributed generation can reduce or eliminate the need for energy infrastructure such as pipelines and power lines while providing additional value such as shading vehicles or reducing air conditioning loads on buildings. And whereas many energy technologies – such as oil refineries – suffer from the NIMBY syndrome (Not In My Backyard) many residential PV programs in the U.S. have a waiting list to literally install the technology in backyards.
ExxonMobil:
"Current technologies have not demonstrated an ability to compete effectively on a large scale with fossil fuels. Despite cost reductions in recent years, the costs of generating electricity from wind and solar power are still two and eight times, respectively, more than those from a modern natural gas-fired plant."
RESPONSE:
Proponents have not suggested that current renewables will on a wide scale cost the same as fossil fuels.
Their competitiveness is being proven in many markets, however. For instance, in Texas, wind power has the lowest generation cost of any new power plant. Due to the highly volatile nature of natural gas prices, wind electricity is frequently cheaper than the cost of natural gas fuel.
Cost reductions for photovoltaics have behaved according to classical experience curve theory, with an approximately 20% cost reduction for every doubling of worldwide cumulative production. Consideration of trends for Dynamic Random Access Memory (DRAM), a type of memory used in most personal computers chips show that cost reduction can continue over several orders of magnitude. There is no reason to anticipate the same trend will not be true for photovoltaics.
If $1 trillion were invested in photovoltaics and cost reductions continued according to the historically observed experience curve for silicon-based PV modules, PV modules would cost less than $350 per kW (comparable to the lowest cost natural gas peaking power plants in the U.S. today) and produce electricity for a retail price of about 4 cents/kWh. Moreover, the cumulative cost of electricity from this hypothetical build out, starting from 2003 vintage PV system prices, would average approximately 6 cents/kWh – less than the average retail cost of electricity in the U.S. today. Volume of production is the most important limit on solar energy’s price, not the need for technological breakthrough.
Yet, in direct conversations with shareholders, ExxonMobil representatives stated the company had never run cost scenarios to determine at what level of production solar would be competitive or worthy of their investment.
In addition, company officials could not identify any individual at the company responsible for tracking renewable energy developments.
ExxonMobil:
"As a result, these technologies continue to rely on significant government subsidies to support their implementation and resulting strong growth projection. As a result, we do not believe that wind and solar energy represents a prudent near-term investment for ExxonMobil."
ExxonMobil’s suggestion that renewable energy is unfairly propped up by government subsidies reflects the common misperception that renewable technologies are subsidized to a greater extent than conventional technologies such as oil, gas, coal, and nuclear. In reality, total direct subsidies and annual program funding from the U.S. government are generally about ten times higher for conventional energy technologies than for renewables (see charts below.)
2002 U.S. Department of Energy Budget,
Select Energy Program Funding
(2002 Department of Energy Budget, www.energy.gov, summary of funding for fossil fuel, uranium and nuclear, and solar programs)
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Subsidies for Conventional and
Renewable Energy Industries In H.B 4
(Industry Benefits in H.R. 4 (107TH Congress) from House Staff report; renewables subsidies from Natural Resources Defense Council (www.nrdc.org.))
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In addition, it is worth noting that ExxonMobil appears to assume that the enormous hidden subsidy of negative environmental impacts from fossil fuel use will continue. The growing trend toward carbon pricing suggests that this assumption is erroneous.
ExxonMobil:
"New technologies are required to effectively and efficiently address costs and greenhouse gas emissions. ExxonMobil, through sponsorship of the Stanford University Global Climate and Energy Project, will be working to find innovative, commercially viable new step-out technologies that have the capability to substantially reduce greenhouse emissions. This activity will position the Corporation to rapidly assess and commercialize new technologies as appropriate to improve shareholder value."
RESPONSE:
ExxonMobil’s contributions to Stanford’s Global Climate and Energy Project (GCEP) are laudable, but they appear to have little to do with protecting shareholder value, given the details:
No Actual Commitments:
- ExxonMobil states no goals for emissions reductions associated with the project.
- ExxonMobil makes no commitment regarding the timing of any reductions or technology adoptions.
Low Funding by ExxonMobil’s standards:
The pledge to Stanford amounts to $10 million per year. It is a small fraction of what the company spends on research to further develop oil and gas. The Stanford pledge equals:
- 1/10 of 1% the $100 billion that ExxonMobil stated in 2002 it would invest in new oil and gas development.
- Annually, 1/60th of the company’s $600 million per year annual internal research budget.
Limited Project Scope and Benefits:
- The scope of GCEP also raises questions with regard to how much of the money will be spent on technology research. For example, Stanford’s press release on the project mentions that the project will identify possible solutions to "consumer acceptance barriers" as well as identify policy options.
- Stanford’s press release also indicates that Stanford will hold "formal legal title to all technology and information derived from this Project, as well as formal legal title to all patents sought." If this is the case, how does ExxonMobil benefit from this project?
- According to the Associated Press, ExxonMobil has already ruled out the potential for solar, wind and fuel cells to meet energy needs and has asked Stanford to do the same. "Sprow said today's cleanest energy sources wind, solar and fuel cells would never be economic enough or reliable enough to meet future global energy demand. As a result, Exxon Mobil has requested that Stanford scientists focus on finding cleaner ways to use fossil fuels as well as creating other "breakthrough, inexpensive technologies," (Associated Press, November 20, 2002).
The project may help ExxonMobil's reputation slightly, particular among those more positively disposed to the company. However, some concern has been expressed in academic circles that ExxonMobil is seeking to influence the scientific community in the same way that it has the political debate. "Exxon's high profile in the venture has prompted some professors and environmental experts -- both at Stanford and elsewhere -- to question whether the company is using its pledge of up to $100-million to Stanford to "greenwash" its environmental reputation." The project has also attracted highly critical commentary from within the Stanford community itself.
ExxonMobil
"The proponents cite competitor actions and regional targets as reasons for ExxonMobil to enter the renewables business. ExxonMobil was the first major oil, gas and petrochemical company to pursue renewables in the late 1970's and early 1980's. We determined after considerable investment that renewables were not in the best interests of our shareholders. While it is true that some of our competitors have recently established wind and/or solar energy ventures, the energy produced is a very small portion of their annual production. According to annual reports, which do not report the profitability of these businesses, the wind and solar capacity additions made in 2001 amounted to less than 0.05 percent of their fossil fuel energy production. We believe that, based on our experience and given the economics of current renewables technologies, an investment in this area faces a greater risk of poor returns than other available opportunities."
RESPONSE:
Proponent’s citation of competitor actions and national (not regional) targets was intended to demonstrate that the pressure to develop renewable energy is, in fact, growing. As mentioned at the beginning of this document, three years ago, there were no national mandates anywhere in the world. Today, fifteen nations and thirteen states require the development of renewable energy – and more policies are on the way.
This growth trend should concern investors. It is a response to growing certainty that fossil fuels are causing global warming. Since the scientific certainty has only grown stronger in the last fifteen years, it is a reasonable expectation that policy responses will grow stronger as well – a view widely shared in the international policymaking and financial communities.
Furthermore, one would be hard pressed to find another company willing to seriously suggest that investments made 20 and 30 years ago are an adequate substitute for current knowledge. The fact that renewables did not make sense to ExxonMobil in the 1970’s and 1980’s has little relevance now. The factors that would influence an investment decision in the present – the technology itself, its costs, the cost of alternative opportunities, the regulatory and market landscape which provides the context for these decisions – have all undergone significant changes since ExxonMobil was last involved.
The fact that renewable energy constitutes a small fraction of competitors overall energy portfolio is not a surprise. The relevant point is that competitors are getting involved as a hedge against future risks that appear quite likely and may be quite substantial. As early participants their costs of entry are substantially lower than a company that chooses to wait until no other alternative is possible.
ExxonMobil:
"ExxonMobil believes that the use of renewables will continue to grow, in large part due to government targets and financial support. However, the growth opportunities in our traditional business areas are far more attractive. The International Energy Agency reference case for Europe projects the energy supplied by renewables to grow by approximately 60 million tonnes oil equivalent by 2020. In contrast, the same forecast projects natural gas demand to grow by nearly 220 million tonnes oil equivalent. On a global basis, ExxonMobil projections indicate that only about 50 percent of the oil and gas that will be needed to meet demand in 2010 is in production today. This represents a significant investment opportunity that should deliver continued shareholder value."
RESPONSE:
ExxonMobil must have missed this July 2001 statement from the International Energy Agency:
"Through the next several decades, renewable energy technologies, thanks to their continually improving performance and cost, and growing recognition of their environmental, economic and social values, will grow increasingly competitive with traditional technologies, so that by the middle of the 21st century, renewable energy, in its various forms, should be supplying half of the world’s energy needs."
