Kicking off the year with a bold prediction
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The current gas crisis has raised, once again, some serious questions about the future of our energy system. Some are claiming that this proves that renewables can't be relied upon. Instead, it simply proves what we've been saying for a long time, that grid scale and long-term energy storage solutions are absolutely crucial going forwards. People used to say that you couldn't get more than 2% renewable sources on to the grid. Then they'd say, no, not more than 5%. Then, not more than 10%. But the UK is well past 30% now, and Denmark is over 50%. People also want to say that this shows that gas is still a good investment. They cheer for these rising prices. But zooming out, higher gas prices simply make gas less competitive relative to renewables. We still rely on it and there is a shortage, partially engineered by Russia. Overall, though, we are being served just another reminder that depending on fossil fuel imports is economically and politically high-risk. It's all part of a tired old narrative that the energy transition is a costly burden we all must bear. It's expensive, global but necessary. At the Paris conference, this was the prevailing – and very hard to sell – idea. But six years on, many are hoping for a very different conference in Glasgow, for COP26. After all, solar, wind and batteries have declined in cost enormously, and – in terms of cost – now undercut most coal and some gas the world over. Back then, no countries had net zero commitments. Now around 70% do. To me, if you want to talk about costs, look at Russia's influence on our energy bills, on shortages and price spikes in fossil fuel markets, the pollution and the wars it has caused, and the already-devastating impacts on the global climate. It would seem crazy to suggest it even just a few years ago, but now the consensus is growing. The energy transition is likely to save us money, and significantly so. That's right. Contrary to what many people think, an aggressive transition to cleaner technologies could save us in the region of five trillion dollars. A recent paper outlines the theory and modelling behind this claim, and I'd like to share some quotes from it along with some discussion and analysis. You can find the full paper here. The authors, Rupert Way, Matthew Ives, Penny Mealy and J. Doyne Farmer, found that, "compared to continuing with a fossil-fuel-based system, a rapid green energy transition will likely result in overall net savings of many trillions of dollars – even without accounting for climate damages or co-benefits of climate policy." That is to say, without even factoring in the costs of climate change, rising sea levels, more natural disasters, pollution etc, the new energy systems we are investing in will save us money compared to the current systems of energy production and consumption. We show that if solar photovoltaics, wind, batteries and hydrogen electrolysers continue to follow their current exponentially increasing deployment trends for another decade, we achieve a near-net-zero emissions energy system within twenty-five years. In contrast, a slower transition (which involves deployment growth trends that are lower than current rates) is more expensive and a nuclear driven transition is far more expensive.There are many advocates of using more nuclear power, and I would be among them if it weren't prohibitively expensive. Just look at the Hinkley Point power station: it is over budget and way over scheduled time, and wildly more expensive than renewables or even gas. The new technologies – Small Modular Reactors – don't offer much encouragement on the cost front either, at least for the time being. If non-energy sources of carbon emissions such as agriculture are brought under control, our analysis indicates that a rapid green energy transition would likely generate considerable economic savings while also meeting the 1.5 degrees Paris Agreement target.This is great to read. But it will come as a surprise to many people, and merits further attention. The paper goes on… The long-term trends provide a clue as to how this competition may be resolved: The prices of fossil fuels such as coal, oil and gas are volatile, but after adjusting for inflation, prices now are very similar to what they were 140 years ago, and there is no obvious long-range trend.Oil and gas price rises are mainly due to inflation. They have been volatile but ultimately flat for over a century. Solar, wind, and batteries, meanwhile, are not commodities. The marginal cost of the input is zero – sunshine and wind are free. So it's the costs of installation that matter, and as technologies, they follow learning curves. That is to say, as scale and experience ramp up, costs fall in an almost predictable fashion. For example, "from 1995 to 2018 the production of lithium-ion batteries increased at 30% per year, while costs dropped at 12% per year, giving an experience curve comparable to that of solar PV." For decades, forecasters have been wildly underestimating the economics of solar and wind. The concept of learning or experience curves hasn't been factored into analysis, and as a result, the incredible reduction in costs has caught nearly everyone out: Of 2,905 projections by integrated assessment models for the annual rate at which solar PV system investment costs would fall between 2010 and 2019, the average (mean) value of these projected cost reductions was 2.6%, and all were less than 6%.And these misunderstandings about how renewable technologies would develop has led to a decade of debate about "how to share the burden of fighting climate change". This has also slowed responses and action which are both necessary to fight climate change and, according to this paper, economically advantageous. The belief that the green energy transition will be expensive has been a major driver of the ineffective response to climate change for the last forty years. This pessimism is at odds with past technological cost-improvement trends, and risks locking humanity into an expensive and dangerous energy future.This paper emphatically claims what we have been saying for years. That the economic drivers of an energy transition exist independently of the climate imperative. Yes, we must act to save the planet, but aside from that, switching to these new technologies – predominantly solar, wind, batteries and electric vehicles – will lead to meaningful savings. You may be interested in
Pain or gain?A familiar face suggests the debate around energy transition has shifted from "pain" to "gain".This reframing was recently suggested by Carbon Tracker, in a piece authored by our esteemed Beyond Oil 3 guest, Kingsmill Bond. "The combination of the above [energy security, energy access, pollution, climate availability, development, geopolitics and unpaid externalities] means that this is an energy revolution that would unfold with or without climate change. Yes, climate change kicked it off and will continue to accelerate it. And without government action it would be slower and more sporadic. But the superiority of renewables would nonetheless drive an energy transition." The article points out how much has changed since Paris in 2015, and sets up the COP 26 conference in Glasgow to be not about sharing the pain out fairly, but about showcasing the potential for gain. Mitigating climate change is no longer an expensive collective action problem; it is a technology revolution with enormous wealth-generating and redistributive potential.He echoes my own beliefs from a few months ago that this year's many announcements amounted to a new Race to Net Zero. In particular, he writes the competition between countries to lead in the key sectors will be a key driver of the transition going forward, rather than the old orthodoxy of countries not wanting to "disadvantage" themselves by decarbonising the fastest. Countries and companies pursuing their own advantage will inexorably drive the energy transition, as they compete to lead in solar, wind, batteries, electric vehicles, renewable hydrogen and green steel. To build and operate the technologies of the future and to deploy them faster than their neighbours. And this very competition will drive faster change.He also echoes the points from the Oxford University paper we looked at above, about how forecasters completely missed the cost curves which solar, wind, and batteries were following. When the Paris Agreement was signed in 2015, the International Energy Agency thought the cost of solar electricity in 2040 would still be higher than that of electricity from fossil fuels, and expected deployment of only a cumulative 360 GW of solar by 2020. According to BloombergNEF (BNEF), by 2020 some 90% of new electricity generation was cheaper from renewables than from fossil fuels, and 710 GW of solar was deployed. Battery prices have fallen still faster, halving from 2015-2020 and sparking a four-fold increase in deployment.This is the new truth of the transition. No longer is pain to be shared, but gains are to be won by competition between companies and countries. This can already be seen in the way that the United States is trying to rapidly catch up with China, which was much earlier to realise that dominating the supply chain for renewable energy and batteries would be a great advantage going forwards. So there is now a new logic to the energy transition – the pursuit of gain. The shift of energy from scarce to abundant; from concentrated to distributed; from decreasing to increasing returns; from extraction by the lucky to manufacturing by the diligent; and from generating rents for a few to bringing prosperity for the many.Together, the Oxford study and Kingsmill's brilliant research have put to be the old idea that saving the climate is an expensive task which we must reluctantly undertake. As Bill McKibben puts it: The public debate hasn't caught up to the new reality – Bill Gates, in his recent bestseller on energy and climate, laments the "green premium" that must be paid for clean energy. But he (and virtually every other mainstream energy observer) is already wrong – and they're all about to be spectacularly wrong, if the latest evidence turns out to be right.Together, all these brilliant people are building a consensus on something we've been saying for a long time. Economics is driving this transition. As investors, we are very much on the side of trying to find the companies which are set to gain the most.  Kit Winder Co-editor, Exponential Investor    | ||||||||
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