In 1954, contemporaries thought that the nuclear age would bring energy at virtually zero cost, ushering in a post-war wave of techno-optimism. Unfortunately, the atomic energy revolution never happened, and by the 70s everyone seemed resigned to the fact that fossil fuels were inevitable: end of optimism. Today times are finally changing: the 20s of this century will be those of the great energy transition. And the end of fossil fuels.
In the past three years alone, renewable prices have fallen at a significantly faster rate than oil, coal and even natural gas have fluctuated. Those who invested in traditional resources lost money, a lot of money, while the solar industry continued to gain ground and deliver profits.
What is driving these market dynamics?
Three major forces are currently at play in the energy market:
- accelerating improvements in renewable energy efficiency,
- the move towards sustainability among institutional investors
- the adoption of public policies aimed at mitigating climate change and other environmental concerns.
These factors reinforce each other and will work to move our society away from fossil fuels and toward clean energy this decade, much faster than almost anyone expects.
Renewable revolution
For decades, the cost-effectiveness of solar energy technology (and, to a lesser extent, wind energy) has increased exponentially. A fact only of academic interest, given that renewable sources were still much more expensive than conventional ones based on fossil fuels.
In recent years, however, costs have fallen to the point where they are now often lower than energy produced by coal or gas plants and falling further. In 2016, Abu Dhabi (a place where just last November 2 fields of seven billion barrels of oil and 1,6 trillion cubic meters of gas were discovered) built a solar power plant. A plant that would provide electricity at a world record price of just 2,42 cents per kilowatt hour, half that of natural gas. A month earlier, in October, Dubai announced the construction of a new world record solar power plant capable of providing electricity for only 1,7 cents per kilowatt hour, with a 30% cost reduction in three years.
The record will be broken again. It's still.
Week after week news of ever new solar systems with ever lower costs arrives. In Los Angeles it was recently approved a new solar plant that will provide 300 megawatts of power at 3,9 cents per kilowatt hour (electricity from natural gas costs about 8 cents per kilowatt hour in the US). Importantly, that price also includes energy storage, meaning the plant will be able to provide power to Los Angeles residents both day and night. This solution overcomes one of the last remaining obstacles to transitioning to renewable energy: reliability. The sun doesn't always shine and the wind doesn't always blow, but if the combined cost of generation and storage is still cheap. This is why renewable energy will eliminate fossil fuels at any time of the day or year.
Not surprisingly, more and more people are choosing renewables and moving away from fossil fuels
In 2000, wind and solar energy together were a negligible production of the global energy produced annually (32 TWh, Terawatt hours). In 2018 had grown to 1,85 TWh, a 56-fold increase in 19 years. Specifically, wind energy has grown by 22,8% per year. Solar by 41,5% per year. It's still only a small sliver of overall energy production, but the growth is scary.
As of 2018, solar and wind energy account for only 3% of global energy. Most people don't think the future of fossil fuels is changing much, but that 3% is a nearly tenfold increase from a decade ago. Renewable energies today look a lot like the internet around 1996: little considered, but on the eve of a very rapid change. At this rate, by 2030 they will make up nearly a third of our energy balance and will trigger an even faster collapse in fossil fuel consumption.
Go easy? Not even
True, I should be cautious in my predictions, but I think I am. I'm probably underestimating how quickly we will adopt renewables. So far, renewable energy has mainly been used to add further capacity to an electricity grid. For this reason, most of the demand actually comes from developing countries, where electricity demand is still rapidly increasing. But to deal a death blow to fossil fuels, renewable energy must start replace existing conventional energy sources: coal and gas-fired power plants and oil-fired transportation. This is what we are starting to see.
As the cost of renewable energy drops, it makes more and more sense to shut down a coal-fired power plant (even a functioning one) and replace it with solar power, or scrap a gas-powered car or truck and buy an electric one. We are approaching the point of no return. Last year, for example, PacifiCorp, a major power company in several US states, has announced that it will close 20 to 24 coal plants (a few decades before expected retirement) by replacing them with 7 gigawatts of renewable energy.
The money goes away from fossil fuels
The speed with which the financial industry is turning its back on conventional energy businesses is astonishing. The efforts of the financial sector to decarbonise can be summed up in two terms: commitment and divestment.
The commitment refers to efforts by financial entities to pressure companies in which they have invested to reduce their carbon footprint or adopt more environmentally friendly practices, often through their shareholder votes. Engagement, in short, attempts to use capital to change behavior.
Divestment instead it refers to the practice of selling stakes in carbon-intensive assets (coal, oil and gas) and refusing to make further investments in those fields.
Climate Action 100+
A December 2017, Betty Yee, director of CalPERS California public pension system, has launched Climate Action 100+, the largest and most ambitious investor engagement campaign ever created. The initiative was created to “commit companies to contain emissions, and improve governance”. Since then the initiative has seen the participation of more than 1,000 people 370 institutional investors from all over the world representing over $ 35 trillion in managed assets, including big names in the financial sector such as BlackRock, Fidelity, UBS and others.
Climate Action 100+ has an extremely specific and action-oriented agenda. The initiative created a list of 161 “focus companies” (you can call it, if you like, “environmental proscription list”) that together represent over 80% of global greenhouse gas emissions to direct their efforts towards change.
Many of these are oil and gas majors: Exxon Mobil, BP and co. But there are also transportation companies such as Ford, Toyota and Boeing, manufacturers such as Nestle and Procter & Gamble and many others. For each sector, Climate Action 100+ draws up a series of agenda items in which it wants target companies to improve and an action strategy for investors, who are also advised to "vote for the removal of failed directors in their responsibility for the risk of climate change".
In their prime work progress report published last year, Climate Action 100+ presented the results achieved and the agenda for the years to come. Data, dozens of cases of successful pressure on companies etc. The report is extremely interesting, I invite you to read it even if you are not an investor.
Fossil fuel divestment campaigns have rapidly accelerated since 2017. As of December 2019, more than 1.200 institutions representing over $ 12 trillion have given up on them.
Norwegian Sovereign Fund
Divestment scored its biggest victory yet late last year with the announcement that the $ 1,1 trillion Norwegian sovereign wealth fund will withdraw from participation in oil and gas exploration and production companies. This news was of particular importance not only because of the size of the Norwegian sovereign wealth fund, but because Norway has gained so much of its wealth thanks to its abundant oil reserves. Those investors directly involved with fossil fuels are also starting to abandon them.
This situation is getting to the point where it could create a domino effect.
Collapse of fossil fuels, the role of governments
As renewable energy becomes increasingly cheaper, governments around the world are taking (or announcing) increasingly aggressive actions to make fossil fuels more expensive by taxing them. At least 40 national and subnational governments around the world are grappling with the launch of a "Carbon Tax", a tax on carbon emissions. And the pace has increased in recent years. Since 2017 China, Singapore, Canada, South Africa, Mexico and Chile have implemented carbon pricing policies and several countries have expanded existing programs. In the Trump-era USA, environmentalists (rightly) lament the Trump administration's decision to withdraw from the Paris Agreement in 2017, but 13 American states (representing 38,8% of US GDP) have done so themselves. They have already passed laws and taxes against emissions. Others will follow.
Public opinion is moving towards the promotion of more aggressive environmental policies. He's not wrong, given the continuing records in C02 emissions. Another nail on the fossil fuel coffin.
The trimurti
these three factors (renewable energy cost reductions, sustainable investment campaigns and government policies) have formed the tightening noose around the neck of the fossil fuel industry.
In summary: Low-cost renewable energy reduces consumers' economic dependence on conventional energy sources and insulates them from the economic effects of a carbon tax (think of a person who drives a Tesla and has solar panels on the roof. They don't care). nothing if the government puts a carbon tax, it won't have to pay it). This increases the percentage of the population that favors environmental policies, and creates a domino effect. The laws impose more costs on fossil fuel companies, hurt their returns and scare away investors. Coal, oil and gas producers fail to remain competitive, the attractiveness of renewable energy increases further, and so on. Yes, a spiral.
Recursive feedback loops like this can be extremely dangerous in the context of financial markets, sometimes leading to sudden, unexpected and spectacular falls in the value of entire asset classes. Everything is ready for such a thing in the fossil fuel market. For coal, for example, it could also happen tomorrow morning.
Coal: dead energy walking
Coal stocks fell by over 30% compared to last year, and the current situation of the Covid-19 coronavirus it will only worsen the only growing market, that of China. Fires in Australia have turned public opinion decidedly against the coal mining market. In the USA the coal miners are filing for bankruptcy like flies.
The oil and gas industry can hold out longer. It's very big, but not too big to fail. I don't know when it might happen (maybe next decade, maybe just a few years from now) but if the oil and gas industry gets caught in the same spiral we could see the entire industry devastated in a matter of months, weeks or days. In such a scenario, the price of oil and gas could ironically rise in the short term, as companies could not even afford to drill. This would make renewables even more attractive. URGENT, to use the exact term.
So don't think I'm not being prudent in saying that by 2030, a third of the world's energy will be renewable. At a guess there is a 50% probability that by 2030 the percentage of global energy generated from renewable sources will be over 50%.
