The Case for Energy Optimism Part I

While domestic energy policy regresses the market for clean energy production has steadily accelerated to an inflection point: It'll soon be cheaper, everywhere.

This week, instead of a collection of topics, I wanted to take a deep dive into something that is near to my heart and always on my mind.

Japan’s environment minister wants the fight against climate change to be ‘sexy and fun’ and although I don’t think I’ll hit that bar, I certainly want to convince you that shifting to clean energy is a challenge we can rise to meet.

Today I want to focus on the energy market we have today, how renewables are fundamentally a technology sector and not a commodity like fossil fuels, and why that means clean energy benefits from a positive feedback loop.

So let’s start with where we are. Which just so happens to feel like where we were.

Outdated Policies Meet A New Market

American energy policy today looks a lot like the America of the 80s: rocked by an oil crisis a decade prior the new drumbeat of “energy independence” focused on domestic production and securing foreign sources of power we knew and loved.

Coal, Natural Gas, and Oil were tried and true and the clean alternatives promoted to fight the 70s oil crisis were still nascent and expensive. While there was a huge focus on improving efficiency the vast majority of improvements came from reducing the use of the dirty energy we had and massively investing in producing it at home. American coal production began to skyrocket in the 70s and the following decade saw an Oil Glut.

America’s Executive energy policy today is about Energy Dominance and stopping the “war on coal” and in 2019 America exported more energy than it imported for the first time in nearly seventy years.

“The golden era of American energy is now underway.” - Donald J. Trump

In 2020 Oil is cheap. Coal is cheap. Natural Gas is cheap. And based on the economic slowdown and increased production, at home and abroad, the Energy Information Administration expects it will stay cheap.

(Chart source)

Looking at the numbers and these policies you’d be forgiven for thinking we’re stuck in the mud. So why am I optimistic?

A big reason is that the economics of renewables are following a different set of rules than fossil fuels which is leading to cost trends that largely ignore American energy policy.

Commodities vs. Technologies

Fossil fuels are commodities and while they are cheap today that fact is as much a factor of geopolitics as it is the actual supply that exists in the world. The current prices are not a guarantee.

When prices are as low as they are today they’re disastrous for the firms that extract them. If you bought the S&P 500’s index of energy companies for $1 dollar in January you’d have 55 cents today. Not quite a Golden Era.

Fossil fuel projects are highly speculative, Oil and natural gas especially, because drilling and fracking have huge up front costs. Research and new technologies reduce some of these risks, but at the end of the day profitability isn’t guaranteed.

“That’s one of the advantages we are seeing in the renewable world; the risk profile is very different” - Irene Rummelhoff, the head of Statoil’s low carbon unit

That risk profile and the increasingly good economics of investing in clean energy is why some firms are starting to talk about how they can get ‘Oil like returns’ from renewables. A key part of this is that the costs for renewables don’t work like they do for natural resource commodities.

Solar, Wind, Battery tech are technologies. Their costs are more predictable and so are their profits. Technologies also learn. Ramez Naam postulates that the best model to view the cost of Solar is through Wright’s Law.

Wright’s Law states that, for most technologies, every doubling of cumulative scale of production will lead to a fixed percentage decline in cost of the technology. This happens through learning-by-doing, a mixture of innovation that improves the technology itself and innovation that reduces the amount of labor, time, energy, and raw materials needed to produce the technology. - Solar’s Future is Insanely Cheap

This is a dynamic that fundamentally doesn’t apply fossil fuels.

We’re learning quickly

Like Moore’s law for transistor’s density on microchips, Wright’s law is a model that allows you to make projections. Naam’s model takes the cost declines from historic doubling of solar energy capacity in the world and applies the low end (30%) and projects it outward.

Recent cost projections continue to be revised further downward.

Batteries follow a similar cost improvement projection. Bloomberg did a learning rate based cost projection for Lithium-ion batteries which came to a similar conclusion. As recently as today Tesla touted that they expect to be able to cut their $/kWh battery costs by 56% in the next three years.

Notably, A $100/kWh battery cost is estimated to be where the hard costs of building an electric car reach parity with internal combustion engine cars and Tesla’s projections happen to place them slightly ahead of Bloomberg’s projection for when the industry will get there.

And last but not least: Wind

The International Renewable Energy Agency (Come on, IRENA) published a cost prediction for wind power in a report last year, which follows exactly the same trend.

What is the common factor here? All of them are benefiting a consistent learning rate and all three are poised to be cheaper than fossil fuels in almost all markets in this decade regardless of government subsidy! This doesn’t even account for another major advantage: Clean energy alternatives are already cheaper to *operate* right now.

Simply put: We are entering into a decade where it soon won’t make financial sense to keep running dirty power plants we already have.

Recommended Reading

That’s a wrap

In the next installment I’ll talk about:

  • Peak Fossil fuel use is already happening in multiple industries and economies

  • How we’re already decoupling energy usage from economic growth

  • The opportunity we have to act on this right now

Had some thoughts on my conclustions, or questions? Leave a comment and let’s chat about it. I have lots of thoughts on this.

Till next time ✌️,