COP21: A game changer or just hot air for the energy sector?

How will the COP21 agreement specifically affect Danish energy businesses and, not least, the companies operating at the Port of Esbjerg?

A GLOBAL MILESTONE, a ground-breaking victory for the climate and the start of a new, green era: these were just some of the reactions to the new climate deal signed by countries all over the world at the COP21 summit in Paris in December 2015.
But how will the deal affect the Danish energy sector? And what will the impact of the low oil prices be?

Boost for wind power

The newly-appointed CEO of the European Wind Energy Association (EWEA), Giles Dickson, was quick to predict that the agreement will open new markets for European exporters.

“Europe's leadership in wind combined with the major new commitments on renewables from emerging economies gives us a golden opportunity to further expand our flourishing export industry. The European wind industry has a 40% share of wind markets outside Europe today. So the INDC commitments on wind could create major new jobs and growth in Europe,” he said shortly after the agreement was announced, adding:

“But to exploit these opportunities the European wind industry will need to keep its competitive edge – and that will require a vibrant home market for wind.”

Representatives of the Danish energy sector were also upbeat about the agreement:

“The global climate deal will make sustainable energy and energy efficiency central issues for the coming decades, and that could prove highly beneficial for Denmark and Danish exports,” said Lars Aagaard, CEO of the Danish Energy Association. The Confederation of Danish Industry had a similar reaction, predicting that Danish exports of climate and energy-related technology could double from 2015 to 2030.

Jacob Pedersen, head of equity research at Sydbank, strongly believes that the agreement is a victory for sustainable energy, and wind power will be first in line to reap the rewards.

“Wind power is one of the solutions on the road to reaching the targets defined at COP21, so we should expect to see even more resources committed to wind power all over the world. That will boost the spread of wind power and mean more business for the Danish wind industry,“ he says, “but the question is how big the change will actually be in Europe, given the already advanced stage of wind power here.”

– but markets are becoming more competitive

According to Jacob Pedersen, the epicentre of the offshore wind industry – which has so far been the North Sea, giving Danish manufacturers and service providers a perfect position – could well move south in coming years.

“The Danish wind industry is currently a huge beneficiary of the very high level of activity within offshore wind in Denmark, Germany and the UK. Going forward, we will see other countries popping up on the wind power map. And don't expect the companies at the Port of Esbjerg to be the big winners if the Italians start erecting wind turbines,” he says.

“I believe growth will be based in other regions, because northern Europe is already relatively mature in that respect.”

At Concito, a Copenhagen-based green think tank, Director Christian Ibsen is excited about the agreement, saying that it has “more ambition than we could have hoped for”.

“The agreement will create huge opportunities for Danish companies operating in sustainable energy and innovative energy technology, but it will also create new competition. Danish companies can expect markets to become much more competitive in the years ahead. That’s why they need to capitalise on their market-leading position in certain areas and go even more green before someone else does it first. If Danish companies don’t continue to take an aggressive and ambitious line in the transition to green energy, other countries will,” he warns.

Specific investment plans = specific export opportunities

Christian Ibsen notes that the agreement has a bottom-up structure and a built-in expansion mechanism that allows for more ambitious targets in the future. That means each country can decide for itself how it wants to work for a transition to green energy while also defining its own national targets. A total of 187 countries have reported their climate plans – their so-called Intended Nationally Determined Contributions (“INDCs”) – to the UN and are committed to evaluating and updating their initiatives every five years to ensure target progression.

“The INDCs reported by the individual countries are very specific investment plans that Danish companies are able to study. It’s a gold mine of information for our exporting companies and truly a great opportunity for Danish companies,” says Mr Ibsen, while also encouraging politicians to make sure Denmark maintains its current pace of transition to green energy.

“It’s about defending the positions of strength in wind, district heating and energy efficiency that we have today,” he says.

“Danish politicians are spending a lot of time debating a 2020 target for Denmark’s climate initiatives, but we have to remember that, from an investment perspective, 2020 is just around the corner. To safeguard Denmark’s competitive strength, we need an ambitious 2030 target. That would give Danish businesses and investors a sense of reassurance of the ambition and the direction of Denmark’s climate initiatives and encourage investment in both existing and new technologies.”

However, it will be just as important to improve Denmark’s position in new areas, not least in electrification, which, according to Christian Ibsen, is a global prerequisite for reaching the target of a maximum temperature increase of two degrees.

“Denmark has a unique opportunity to become a pioneer in electrification through wind. What’s blocking us is our current regulation and system of taxation. It’s urgent that we introduce wind power into the transport system by way of electric vehicles and into heating systems by using heat pumps,” he says.

“Electrification is something everyone needs to do, and within the next few years, there will be demand in China and other major industrial countries for how electrical power can be integrated into other sectors. It will be interesting to see the system solutions that will be developed. Potentially, they could be the next major exporting success stories. There is no time to lose. We have to start now. It’s also crucial that we can truly connect to the European energy system. It is absolutely essential for both climate and financial reasons that we can transmit our wind power to the rest of Europe.”

Is this the end of the fossil era?

According to the COP21 agreement, greenhouse gas emissions will be phased out by about 2050, but this is by no means an indication that the agreement will put an end to fossil energy.

“Politically, the Paris agreement is a strong signal that the world is now really moving towards a transition to green energy and that we are moving closer to ending the use of fossil energy. In simple terms, you might say that the signatures on the Paris agreement marked the beginning of the end of the fossil era. But what happens will strongly depend on how successful the solutions are,” says Christian Ibsen.

On the other hand, the agreement does allow for the continued use of fossil energy if it proves possible to mature the technologies capable of removing carbon dioxide from oil, gas and coal emissions, similar to what happened with the scrubber technology used in the shipping industry. Such solutions are already on the market today, but they’re nowhere near the scale needed,” he explains.

At the same time, Jacob Pedersen is certainly not about to write off fossil energy, considering the prospects of growing energy consumption around the world – not least in Asia, where the growing middle class in China and India will drive up demand.
By itself, COP21 is not a game changer for the oil and gas sector. We may have seen oil prices plummet, but COP21 is not the cause of the problems in the oil and gas industry. Tomorrow’s energy needs will be so great that oil and gas will not simply be phased out,” he believes.

“But obviously, government subsidies will be channelled elsewhere, and that could have a negative impact on fossil industries. Given the fact that oil and gas are not the route to meeting the COP21 targets, and in fact have the contrary effect, we should not expect oil and gas to continue to receive support, but that the subsidies the industry currently receives will be channelled elsewhere, also to wind power.”

Sydbank: Oil and gas will still be extracted from the North Sea in 2040

The lower oil price is a double-edged sword for the transition to green energy. On the one hand, the record-low market price means it is cheaper than ever before to consume oil, making it less attractive to invest in sustainable energy.

On the other hand, falling prices cause volatility in the market for oil and gas, and this has already resulted in oil extraction or oil exploration projects worth billions of kroner being postponed or cancelled altogether. At the same time, the drop in oil and gas revenue has reduced the financial resources available to oil-exporting countries.

According to Jacob Pedersen, it is still unclear whether the long-term or the short-term consequences will have the greater impact. He strongly believes, however, that, regardless of the climate agreement and the lower oil prices, oil will still be extracted from the North Sea in 2040.

“Given the extent of the demand for energy, it would take quite dramatic developments on a global scale for that to change, so I’m not at all prepared to write off the oil and gas industry. Still, there’s no doubt that with oil prices dropping so low, the industry is currently experiencing its own financial crisis – only two or three times worse than the original financial crisis – and that will take a bite out of share prices, jobs and investment. The question is how long the current oil glut will last, but that has nothing to do with COP 21.”

Limited reaction from the stock markets

Ultimately, the specific consequences of the agreement depend on how it will be implemented in countries around the world and on whether the financial sector will be prepared to provide financing to support it. That is why the initial response from the stock markets has been relatively muted, stresses Sydbank’s Jacob Pedersen.

“What we have now is objectives, but we still need to see how they will be reached. That’s the reason for the limited investor response,” he says.

“What has surprised a lot of people, including investors, is the fact that they actually managed to reach an agreement at all. But even though the countries have agreed on specific targets today, it will still be some time yet before investors see any signs that the targets will result in real action being taken. In other words, it will all depend on how the agreement is implemented in the different countries around the world.”