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Biden opens a new era of American energy

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One person to start: Joe Biden. In energy terms, the administration is already flying. The US rejoined the Paris climate agreement within hours of the inauguration yesterday and a salvo of other big moves demonstrated the White House’s change of attitude on energy and the environment — from scrapping the Keystone XL pipeline permit to scores of agency reviews.

Welcome to Energy Source. Clean energy policy is suddenly at the centre of a vast federal plan to revive the American economy. And an era of deregulation and fossil fuel promotion in the world’s biggest and most consequential energy market is over.

Amid the celebratory mood among Mr Biden’s supporters, it is still worth pointing out that the battle to revolutionise the US energy system has only just begun. Congress, specifically the divided Senate where Mr Biden’s Democrats hold the most narrow of majorities, will decide the future of the sweeping clean-energy legislation the new president seeks.

Then there’s the conservative-leaning judiciary too. Despite this week’s stunning DC Circuit ruling against the Trump administration’s power emissions rules — a telling coda to an era of rampant deregulation — the Supreme Court and its Trump-appointed justices await.

But don’t overlook this ground-shifting moment for global energy. With the White House arrival of Joe Biden, a man who said the US needs to “transition away from the oil industry”, America will re-enter the collaborative global climate effort and put renewables at the heart of an urgent economic stimulus programme.

Naturally, we’re focusing on Mr Biden today: what the first main energy steps are and what they mean. Data Drill looks at the Trump era in energy charts. Endnote picks up news about the ever-falling costs of solar power.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Biden’s energy and environment overhaul begins

“It’s time for boldness for there is so much to do,” said President Biden in his inauguration speech. Chief among the “cascading crises” he vowed to tackle is climate change.

He has not wasted time. A barrage of executive orders relating to energy and climate has led environmentalists to proclaim yesterday as the best first presidential day ever. ES took a look at some of the big shifts.

1. Rejoining Paris

Within hours of entering the Oval Office Mr Biden informed the UN that the America was rejoining almost every other nation in pursuing the goals of the Paris climate accords.

It may be no surprise, but the significance of the move is enormous. It signals the US is serious about overhauling its economy to tackle emissions — and setting itself the challenge of proving it.

“I think that it’s symbolic to do that on the first day, obviously, but it’s also a way to set it as a top priority for this administration — a top domestic priority, top foreign policy priority and one of the biggest national security priorities,” said David Levaï, a former Paris agreement negotiator and researcher at the Institute for Sustainable Development and International Relations (IDDRI) think-tank.

It commits Mr Biden to moving beyond his campaign rhetoric to tangible action. Ahead of November’s UN climate change conference in Glasgow, the US will have to lay out a plan defining how it will cut emissions by 2030.

Mr Biden aspires to take a leading role on tackling climate on the international stage, pushing other nations for deeper emissions cuts too. For that to happen, the targets he sets out will have to align with his promises to eliminate emissions from power production by 2035 and achieve net-zero emissions across the economy by 2050. They will also have to seem realistic to the rest of the world.

“If it is a target that is not consistent with their 2050 commitments, or that seems shiny and beautiful but not really achievable, the rest of the international community won’t play ball,” said Mr Levaï.

2. Stopping Keystone XL

Revoking the Trump administration’s permit for the Keystone XL pipeline, which would carry ultra heavy Canadian oil to the Gulf coast, is another big move. It doesn’t just kill a project that had become a front line in the climate battles, it signals to the oil and gas industry that the new administration will take a tough stance on all new infrastructure.

“This isn’t a story that’s only specific to Keystone,” said Jackie Forrest, executive director at the ARC Energy Institute in Calgary. “I would say in North America it is more and more difficult to build pipeline projects.”

Midstream operators are nervous. Dominion Energy abandoned its Atlantic Coast Pipeline last year after protracted court battles. The Dakota Access Pipeline, already operational, was almost shut down by a federal court and sparked protests supported by the incoming interior secretary. The North Dakota-to-Illinois pipeline remains mired in a legal fight and could come across Mr Biden’s desk. 

Oil and gas supporters say hindering pipelines will kill production growth. Opponents, energised by the Keystone XL decision, say that is the entire point.

The Mountain Valley Pipeline in the mid-Atlantic and the Enbridge Line 3 Pipeline in the Midwest are among the projects that will provoke an activist push, said Josh Axelrod at the Natural Resources Defense Council. “We’d really like to see a lot of attention focused on the permitting of fossil fuel infrastructure in general,” he said. “It’s not just about emissions, but about the [production] they lock in for many years.”

3. Review of Trump rollbacks

The president ordered all departments and agencies to “immediately review and take appropriate action to address” all regulations imposed by the Trump administration that are bad for public health, the environment, science or the national interest.

The list is extensive. Trump-era rules on everything from methane emissions and fuel economy standards to wildlife protection and fracking reporting requirements on federal lands will be revisited.

Some actions that were imposed late in Mr Trump’s term can be quickly tweaked. The loosening of standards on detecting and fixing methane leaks, for example, could be reversed relatively speedily through congressional review.

Reimposing and tightening the methane rules, said Matt Watson, vice- president of energy at the Environmental Defense Fund, would be the “biggest thing that the Biden administration can do” to chalk up a quick win on emissions. It will win support from some in the oil industry, who opposed the Trump rollbacks.

Other Trump era policies will take more time to change.

“There’s clamour among climate advocates for things that Biden can do immediately with a stroke of the pen that take effect from day one — and we are already seeing that happen on an incredible scale,” said Melinda Pierce, legislative director at the Sierra Club. “Still, it’s important to recognise that a number of other high priority administrative actions will take time to implement properly, and that many of these orders are about initiating a process, not completing one.”

And the Biden administration’s signals alone will trigger responses — especially when it comes to fuel economy standards.

The formality of the process means an official rule change could take months, said Michael Gerard, faculty director of the Sabin Center for Climate Change Law at Columbia University. But that does not mean that automakers can afford to rest on their laurels in the interim, he said. They are already planning ahead.

“The signal has already gone out to the manufacturers that this is what’s coming and they are responding accordingly.”

4. What about oil and gas drilling?

Mr Biden has halted new oil leasing in the Arctic National Wildlife Refuge — slapping a moratorium on the Trump administration’s last-gasp effort to open the area to drillers. Stopping this process outright, however, will be trickier.

Environmentalists and analysts expect a further, much more far-reaching freeze on all leasing of federal lands for oil, gas and coal — something Mr Biden promised on the campaign trail — to follow swiftly.

Such a ban would reduce US oil production by up to 4 per cent a year, according to Scott Sheffield, chief executive of Pioneer Natural Resources, a big shale driller. It would, he said, mark the end of the country’s brief flirtation with energy independence.

“It means we’re going to import more foreign crude. We’re going to import more from the Middle East,” said Mr Sheffield. (Myles McCormick)

Data Drill

Donald Trump championed American fossil fuels. What transpired?

US oil production soared during Mr Trump’s first years — before the pandemic ravaged the industry. Output is now around 11.1m barrels a day, says the Energy Information Administration, up nearly 25 per cent from the start of his term.

Line chart of US crude production, m barrels a day showing US oil production went from historic boom to epic bust

Crude and fuel exports rose too. The US is today less reliant on imports than it has been in decades, even if last year’s Saudi-Russian supply war exposed the US oil industry’s vulnerability to price-moving events abroad.

Column chart of Net imports of oil and products, barrels a day (millions) showing The US became less reliant on foreign petroleum

Meanwhile, the coal revival never arrived. Ultra-cheap natural gas and surging renewables dominated the electricity sector.

Line chart of Electricity generation by source, % showing Coal fell, renewables rose and natural gas reigned

And Mr Trump did not derail a long-running decline in US carbon emissions from the energy sector as many had feared. The pandemic pushed emissions to new lows in 2020, but that is likely to be unsustainable.

Column chart of Carbon emissions from energy consumption, million metric tonnes showing Covid-19 crisis pushed carbon emissions lower

Few analysts advised people to put their money into clean tech stocks as Mr Trump came into office, but that would have been a wise bet.

Line chart of Share price change, % showing Oil and gas producers missed out on the market rally

Power Points

  • President López Obrador’s championing of fossil fuels has short-circuited the shift to renewable energy in Mexico.

  • Trafigura invested €1.5bn in a vast Arctic oil development in Russia.

  • BHP is set to slash the value of its Australian thermal coal assets — an outcome of China’s decision to ban imports.

  • Joe Biden’s climate envoy must restore confidence that the US will tackle climate change, says a Politico piece on what the world wants from John Kerry.

Endnote

Solar power costs will fall by as much as a quarter over the next decade, becoming the cheapest source of new power in every US state, Canada, China and 14 other countries, according to a new report from Wood Mackenzie.

Solar will account for most of the 4 terawatts of solar and wind power added to the grid globally by 2030, as renewables’ share of total power capacity rises from 10 per cent now to 30 per cent in 2040.

After a 90 per cent cost decline over the past two decades, solar is already the cheapest form of new generation in 16 US states, plus Spain, Italy and India, the consultancy said. Despite the pandemic, global capacity installations rose to 115 gigawatts, compared with 1.5GW in 2006.

The advances may pose a problem for investors, however, as declining wholesale prices may reduce the sector’s profitability, Wood Mac said.

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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UK listings/Spacs: the crown duals

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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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