Municipal energy: time for radical action

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Despite the best efforts of successive governments to create an energy market, it remains notoriously uncompetitive. In Europe, municipal energy is commonplace and growing – we should do the same in Scotland.

The so called market is dominated by the big six utility companies, whose pricing practices have been criticised by the competition watchdog. Consumer trust in the market is low and they are reluctant to switch suppliers for a better deal given the hassle of switching. In fairness, the Big Six are often unfairly criticised and new entrants have been guilty of some pretty poor practices as well. The fault is in the system.

The IPPR, has made a convincing case for local authorities to set up municipally-owned energy companies that can supply electricity and gas at competitive prices and don’t have to distribute profits to private shareholders. By targeting those on low incomes, they can also help tackle fuel poverty. The local authority “brand” may also encourage otherwise reluctant low-income households to switch suppliers and save money. Nottingham and Bristol have followed this model and London, under a new Labour Mayor, looks likely to follow.

In Scotland a slightly different model is being adopted. Our Power is a community benefit society established and owned by a number of local authorities and housing associations. It too aims to tackle fuel poverty through the supply of affordable energy, focusing on social housing tenants, and seeks to buy a minimum of 30% of its energy from renewable sources. The Scottish Government is also at least considering setting up its own energy company, although details are limited.

The problem with these models is that they are simply playing the failed market and are relying on the same wholesalers. An alternative approach is for councils to establish genuine energy companies that generate renewable electricity and help households to install energy efficiency measures, funded from the long-term savings in their energy bills.

The APSE research paper, ‘Municipal Energy: Ensuring councils plan, manage and deliver on local energy’, found that:

  • For every £1 invested in renewable energy schemes there is a further £2.90 in cashable benefits
  • 17 jobs can be created from every £1 million in energy saving measures on building
  • Energy efficiency and renewable energy can create 10 times more jobs per unit of electricity generated than fossil fuels
  • The local government sector annual energy bill of £750 million could be reduced by up to half by leveraging in spending power and using readily available and low cost technologies existing buildings.

Fife Council has done some of this with its £1.3 million turbine at the council’s recycling and resource recovery facility near Ladybank. This is expected to generate enough electricity to power 200 homes. They also generate clean energy from garden and food waste at the council’s anaerobic digester and from landfill gas. Aberdeen has similar projects as well as the city’s district heating scheme. A number of councils use solar photovoltaic panels.

Glasgow City Council is in the process of setting up an energy services company which will oversee the creation of renewables and low carbon projects in the city. It has mapped sites, but progress has been slow.

A more radical plan for the city has been proposed by Jim Metcalfe, based on research carried out by the Energy Saving Trust. This would involve the creation of a locally-owned company which would be able to reinvest profits from power generation on improving building insulation and reducing fuel poverty. The council should be leading on this, using council bonds, available at historically low levels, to finance the plan.

While electricity generation is important, we also need to make progress on heating homes. This is where district heating schemes come in. The Energy and Climate Change Select Committee heard in January that the £300 million government scheme to develop district heat projects needs a “regulatory investment framework” during this parliament to support future growth. District heating is a 50-80 year long investment and so you want to attract the lowest possible cost of capital to ensure the lowest cost for consumers. Councils are again in the best position to do this. In Scotland, work has begun on tapping into geo-thermal heat from disused mine workings.

Governments could help more by making energy efficiency a national infrastructure project. In Norway, the introduction of legislation to support district heating has shown a 150% increase in the installed capacity over the last 10 years. This has helped make it possible for the city of Drammen to create a district heating network that supplies several thousand homes and businesses with clean, affordable heat. This system didn’t rely on Scandinavian engineering, but the expertise of Glasgow-based Star Renewables.

There are a number of interesting municipal energy projects in Scotland and the rest of the U.K. However, they are patchy, small scale and not nearly radical enough. We need councils to take the lead, establishing full scale energy companies that can provide energy efficient homes with cheaper electricity and heat. They would also generate desperately needed revenues.

This would be municipal enterprise of the sort councils in the 19th Century created to revitalise our towns and cities. We now need 21st Century municipal leadership to take this forward.

This post was originally published here.

The financial threat of unburnable carbon

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The value of fossil fuel companies is directly linked to the amount of coal, oil and gas that control and can physically burn.

Climate policies established by governments to limit global warming restrict the amount of fossil fuels that can be safely burnt whilst remaining within planetary boundaries.

These policies reduce the volume of usable fossil fuel reserves and therefore the market value of fossil fuel companies. The resulting excess reserves are known as unburnable carbon.

According to calculations by research group Carbon Tracker up to 80 percent of oil, gas and coal reserves listed on stock exchanges are unburnable if we are to limit global warming to 2 degrees C. Naturally even more fossil fuels are unburnable if we are to reach the UN’s aspiration of limiting global warming to 1.5 degrees C.

Market values and the business models of fossil fuel companies do not reflect the limits established by policy commitments. Companies such as BP and Exxon Mobil are extracting fossil fuels for a world warming by 6 degrees C.

If and when a 2 (or 1.5) degree limit on warming is properly enforced this carbon bubble will burst and fossil fuel companies share value will plummet.

They will not be able to sell their unburnable carbon reserves, and they will be burdened with useless machinery and infrastructure, no longer required due to declines in fossil fuel valuations, extraction and consumption.

Climate change can be expected to burden fossil fuel companies with stranded assets in a number of ways:

  • Regulatory stranding: a change in policy or the law limits or bans extraction;
  • Economic stranding: the costs of extraction rise above the market price of a resource;
  • Physical stranding: longer transport distances, extreme weather effects, flooding of mines and wells, droughts etc;

Scientists, advocacy groups and environmentalists have known for decades of the threat runaway climate change poses to society and our environment.

What these new concepts, the carbon bubble, unburnable carbon, and stranded assets, articulate coherently for the first time the financial risk that climate change, and policies to limit its effects, poses to the value of fossil fuel companies and by extension those who invest in them, such as council pension funds.

Carbon risks and council pensions

Local government has a fiduciary duty to manage their workers’ pension fund investments in the best interests of fund members and to consider and develop strategies to actively manage or avoid risks that may reduce the value of pension fund assets, ensuring prudent management of the pension scheme.

Asset managers and other industry professionals have traditionally viewed climate change as a social and environmental risk, but not a financial one. Instead climate change has been seen as an ethical issue, a secondary consideration to maximising the financial strength of pension funds.

The carbon bubble has shifted the debate, forcing carbon risk onto the table as a key discussion point.

Mark Carney, Governor of the Bank of England gave a speech entitled ‘Breaking the Tragedy of the Horizon‘, stating:

“There is a growing international consensus that climate change is unequivocal” … “once climate change becomes a defining issue for financial stability, it may already be too late.”

Fund managers and investment professionals have been slow to change the way they invest to protect their investments from these risks.

Furthermore, as financial products have become more complex local council have managed fewer funds directly. Instead they outsource many investment decisions to external fund managers, who invest on their behalf based on a Statement of Investment Principles (SIP) drawn up by the council.

Council financial officers have been slow to brief their external fund managers to demand action on fossil fuels, leaving funds vulnerable to the carbon bubble.

Councils lose £683 million as coal crashes

During the 2015/16 financial year global oil prices slumped from $100 a barrel to less than $40 a barrel. 48 American oil and gas producers filed for bankruptcy in 2016 alone.

The price of coal was also hard hit. In April 2016, Peabody Energy, the world’s largest coal producer filed for bankruptcy protection in the USA.

Campaign group Platform analysed the investments of 61 council funds into BHP Billiton, Rio Tinto, Glencore and Anglo American over this period.

They found that across the UK local government pension funds lost up to £683 million from the coal slump. The  Greater Manchester Pension Fund alone lost £148 million.

Engagement as protection

Rather than supporting divestment from fossils fuels, many local authority pensions advocate shareholder engagement with fossil fuel companies. In the case of climate change this could mean trying to convince companies like BP and Shell to stop extracting fossil fuels and promote energy efficiency and renewable alternatives.

In 2000 major oil company BP ran a global advertising campaign giving itself the new slogan ‘Beyond Petroleum’. Yet BP’s marketing proved to be greenwash. Their last renewable energy division was unceremoniously dumped in 2013 to allow it to concentrate on its ‘core’ business: fossil fuels.

Investors like pension funds engaging with fossil fuel companies seems highly unlikely to drive a low carbon transition. True engagement needs the pressure created by divestment. “Engagement without divestment is like a criminal legal system without a police force.”

Most local government pension funds appear unwilling act to exclude fossil fuels from their investments. A spokesperson for the Worcestershire fund said:

“Our key aim [is to] continue to pay pensions as they fall due. Part of that trade-off involves ensuring our portfolio is diversified across sectors. This inevitably means we will invest across a range of industries and that will, at times, include fossil fuels.”

Effective action: divestment

Some are moving in a different direction. In October 2015, the Environment Agency Pension Fund became the first Local Government Pension Fund to formally commit to begin divesting from fossil fuels, agreeing to dump 90% of its coal assets and 50% of its oil and gas stocks by 2020.

Mark Mansley, the Fund’s Chief Investment Officer said:

“We believe it will help address the risks and opportunities as the impacts of climate change materialise and is entirely consistent with securing the long-term investment returns of the fund and our fiduciary [legal] duty.”

Since this time a further two funds have made formal commitments to divest from fossil fuels: Waltham Forrest, London and South Yorkshire.

Campaigners are encouraged to engage with the financial managers and councilors responsible for running and scrutinising council pensions, demanding action to reduce carbon risk and divest from coal, oil and gas holdings.

Find out how much your council pension fund invests in fossil fuels here.

The author acknowledge the work of the Carbon Tracker Initiative whose report “Unburnable Carbon” introduced the concept of the carbon bubble.