It’s been a funny old year
Despite all of the doom and gloom about the state of the environment I have always been positive that we can find a solution, and prevent disaster. The steps we need to take are straight forward, and many are already working.
Resource consumption per head of population in the UK has fallen by a third in the last 20 years, and we are creating nearly 60% more wealth per kg of raw materials over the period. We are breaking the relationship between growth in GDP and consumption of raw materials, which is crucial if we are to limit climate change.
My generation consumes roughly half the raw materials of my dad’s generation, and my daughter’s generation will consume half as much as mine.
2020 has been an awful year, but the one really positive thing has been the shift in the cost of renewable energy vs fossil fuels. For the first time ever the cost of renewables has fallen below the cost of oil, gas and coal. This is a massive moment
For the last few decades fossil fuels have been cheaper than green alternatives. This shouldn’t be a surprise. Building an energy extraction infrastructure is expensive, whether it is oil, coal, wind or waves. The big capital spend on fossil fuels happened a long time ago, and for the last few decades we have been enjoying oil, gas and coal at marginal rates – it is cheap to squeeze a bit more production out of old investments.
Production of renewable energy generating capacity required a huge capital investment, which made renewables more expensive. This was often used as a reason to stick with old, polluting technology.
Part of the reason for the fall in price of renewable is simply that as we produce more renewables relative to the sunk cost the marginal cost falls. Even with the total collapse of the oil price renewables are now cheaper. This is where renewables have a huge advantage – there is still a marginal cost to digging coal or extracting oil and gas. People still need to do the work. But once the capital cost is spent the marginal cost of renewables is close to zero – another wave or another sunny day costs very little.
But there is another key factor: the learning rate. Each iteration of renewable technology is cheaper and more efficient. The learning rate on renewables is 20%+, which means that every generation of renewable technology gets a lot cheaper. The first iterations of renewables were expensive, the latest iterations nearly half as cheap. These savings come from better product design, larger arrays, and economies of scale. New design and installation techniques in India, for example, have slashed the cost of solar power.
Finally we are in a era of sustained low borrowing costs around the zero bound. It has never been cheaper to invest in renwables
That’s why we have had a flurry of political announcements about de-carbonisation. Denmark already produces more than half of it’s energy from renewables, and will eliminate all fossil fuel use for power generation by the end of the decade. The UK plans to generate all domestic electricity by renewables by 2030 and be carbon neutral by 2050. The reduction in carbon dependence is happening so quickly that by next year we will run out of coal to power heritage steam railways. My dad will be gutted.
Of course with a Boris Johnson Government any headline comes with a pinch of salt; the Government has failed to deliver on so many things. But what is different with this announcement is that it has economics on it’s side, it’s not just a moral case for green energy, but a commercial imperative.
We are about to experience a massive change in the global economy. The equivalent of the industrial revolution. Not only will carbon emissions fall hugely but the cost of power will fall with it. A new era of clean, cheap energy, which will transform the economies of poorer nations.
But there are 3 other huge changes –
- The fossil fuel giants will no longer own US politics, using their wealth and power to prevent environmental legislation. New tech giants will take their place, but the political obstruction of new green energy will go.
2. The Middle East will change forever. Massive oil wealth supported authoritarian regimes across the region, and further afield in the Muslim world – millions of Pakistani men work for oil companies for example. Many middle class westerners blame recent conflicts in the region on the US and UK thirst for oil, but I think this is a mistake – as demand for oil has fallen, and the oil price with it, the authoritarian regimes built on oil money have crumbled. The West’s failed intervention in Iraq has meant that future regime collapses like Syria have been allowed to run their course with even bloodier results. This process of regime collapse will accelerate, spurred on by Russia and Iran. Oil wealth also supported groups hostile to Israel – it is no co-incidence that the fall in the oil price has led to a series of rapprochements between Israel and the Arab world.
3. First mover disadvantage will be gone. When the costs of shifting to renewables was high there was a disincentive for countries like the UK investing in clean energy if China and India were building coal fired power stations. This changes the international dynamic completely.
It will be a while before falls in the cost of genearting electircity feeds through to lower costs to consumers. New generating technologies need new distribution systems to equalise demand and supply for power, and storage has costs too.
But the cost of energy will fall, and with it we have the prospect of the great uncoupling – ending the connection between economic growth and resource utilisation forever. This new industrial revolution is the key step towards saving the planet.
Despite the darkness of this year, I am more hopeful than ever that we will rise to the challenge of climate change
https://www.lazard.com/perspective/levelized-cost-of-energy-and-levelized-cost-of-storage-2018/
https://epic.uchicago.edu/wp-content/uploads/2019/07/Do-Renewable-Portfolio-Standards-Deliver.pdf
https://ieeexplore.ieee.org/document/8286218