In 1954, contemporaries thought that the nuclear age would bring energy at virtually no cost, ushering in a post-war wave of techno-optimism. Unfortunately, the atomic energy revolution never happened, and in the 70s everyone seemed resigned to the fact that fossil fuels would be inevitable: an end to 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, renewables prices have fallen significantly faster than fluctuations in oil, coal and even natural gas. Those who invested in traditional resources lost money, a lot of money, while the solar industry continued to gain ground and guarantee profits.
What is driving these market dynamics?
Three important forces are currently at play in the energy market:
- improvements in accelerating 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 are mutually reinforcing and will work to move our society away from fossil fuels and towards clean energy this decade, much faster than most people expect.
Renewable revolution
For decades, the cost-effectiveness of solar energy technology (and to a lesser extent wind energy) has increased exponentially. A figure of academic interest only, given that renewable sources were still much more expensive than conventional ones based on fossil fuels.
In recent years, however, costs have dropped to the point where they are now often lower than energy produced from coal or gas plants and are falling further. In 2016 Abu Dhabi (a place where 2 fields of seven billion barrels of oil and 1,6 trillion cubic meters of gas were discovered last November) built a solar power plant. A plant that would have supplied electricity at a world record price of just 2,42 cents per kilowatt hour, half 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 energy 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, which means the facility will be able to provide energy to Los Angeles residents both day and night. This solution overcomes one of the last remaining obstacles to the transition 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 energies will kill 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 global energy produced annually (32 TWh, Terawatt hour). in 2018 had grown to 1,85 TWh, a 56-fold increase in 19 years. Specifically, wind energy grew by 22,8% per year. Solar 41,5% per year. It's still only a small sliver of overall energy production, but the growth is frightening.
As of 2018, solar and wind energy represent 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 forecasting, but I think I am. I am probably underestimating the speed with which we will adopt renewables. So far, renewable energy has been mainly used to add further capacity to an electrical network. For this reason, most of the demand actually comes from developing countries, where the demand for electricity 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 decreases, 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 to demolish 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 the efforts of financial actors to pressure the companies in which they have invested to reduce their carbon footprint or adopt more environmentally friendly practices, often through their shareholder votes. Commitment, 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 over 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 has created a list of 161 "focus companies" (you can call it, if you like, the "environmental ban list") that together account for more than 80% of global greenhouse gas emissions to steer their efforts towards change.
Many of these are oil and gas majors: Exxon Mobil, BP and company. But there are also transportation companies like Ford, Toyota and Boeing, manufacturers like 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 directors who have failed in their responsibility for the risk of climate change ".
In their prime work progress report published last year, Climate Action 100+ presented the results obtained and the agenda for the years to come. Data, dozens of cases of pressure exerted successfully 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
The divestment marked its biggest win 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 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 introduction 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 US, environmentalists (rightly) complain about the Trump administration's decision to withdraw from the Paris Agreement in 2017, but 13 US states (representing 38,8% of US GDP) have done it themselves. They have already passed emissions laws and taxes. Others will follow.
Public opinion is moving towards promoting 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 reduction, sustainable investment campaigns and government policies) have formed the tightening noose around the neck of the fossil fuel industry.
Bottom line: 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. 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 higher costs on fossil fuel companies, hurt their yields and drive investors away. Coal, oil and gas producers fail to remain competitive, the attractiveness of renewables 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 they have made public opinion turn decisively 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 is very big, but not too big to fail. I don't know when that could happen (maybe the 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 whole 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 couldn't even afford to drill. This would make renewables even more attractive. URGENT, to use the exact term.
So don't think I'm not prudent in saying that by 2030 one third of the world's energy will be renewable. At a glance, there is a 50% probability that by 2030 the percentage of world energy generated from renewable sources will be over 50%.
