Does the Unsettled Global Economy Present Opportunities for Energy Investment?
As the global economy moves from one crisis to the next does it need to think long term? Do long term energy investments provide a solution?
Troubles have been brewing in the Chinese stock market for some weeks, just as Europe was facing the possibility of a ‘Grexit’, so it was no surprise that it went somewhat under the radar. Although the Chinese economy still has the growth figures that western nations would die for, its economy has been slowing. The market’s reaction is a realisation that maybe they had too much faith in China’s overhyped growth figures.
So the global economy is facing a reality check. China is one of the main drivers of growth so it's clear forecasts will have to be revisited. Some economists feel that this is symptomatic of a new norm in global economics in which the world economy lurches from one crisis to the next. The high profile economist Paul Krugman believes that these are the result of “… too much money… chasing too few investment opportunities”. So what if there were a sector that the world will be forever reliant upon and presents investment opportunities? In the form of energy, there is. The shift to a low carbon economy presents clear untapped investment potential for all that money.
The IPCC was the first to identify the economic and political “win-win” benefits of dealing with climate change. The macroeconomic benefits of decarbonisation have been hailed by world leading economists such as Lord Stern. Growth will be a cornerstone of the negotiations that take place in Paris in December. So why is economic ‘win-win’ still not cutting through to the levels we would hope?
In reality the length of time investors have to wait for their return on investment is too long. If you are trying to make a quick return then waiting 15-20 years to a profit on wind or solar farm is not ideal. While investing in the R&D of new technology such as CCS could have huge export opportunities in the billions, the lead time is just too long for some investors. But maybe that short-termism needs to change; maybe policy makers and investors need to think long term if global economic instability is the new norm.
The energy sector needs to talk up its investment opportunities, while also make long-term investment attractive and safe. It is equally important that the energy sector looks to build relationships and influence the conversations with financial institutions as much as it is with regulators or Government.
The difficult aspect is that energy policy can be subject to quick political change. Which inevitably leads to risk. If the political risk is too great, investment is stopped dead in its tracks. Therefore Governments do have an important role in helping to create the right environment for investment. When renewables face sudden change the first thing to happen is an immediate halt in access to finance. Even toying with a policy change can be dangerous. But politics is politics, an unpredictable constant. It is paramount that when engaging with Government tangible evidence of dented investment opportunities is highlighted. It is a stretch but maybe Government could even try and use some levers of power to gently nudge investors towards long term energy investments? Combine this with the City of London or Wall Street advocating the benefits of security of investment energy provides, and it could be a case of one hand could washing the other.
The energy sector should look to help the Government join the dots between the macro and local economics, the City of London and the power station, energy security and decarbonisation. The energy sector powers the world and there is an opportunity to think more than just keeping the lights on.