So we've got all these shiny renewable energy resources coming online now, and everyone
,including me, is getting a little bit giddy with anticipation and optimism as we look forward to
the brave new world that these sustainable technologies appear to be promising us.
'But hold on a second!' .. say the scientists and economists, 'we've got these things called
integrated assessment models that we've worked jolly hard to develop and they're even included
in those big important reports from folks like the Intergovernmental Panel on Climate Change.
They tell us that the cost of renewable technologies will initially be very high
compared to the existing mature technologies of coal oil and gas and that those costs will
only fall very slowly over several decades.' Moving too fast into renewables, they say,
could therefore cause some unforeseen and very unwelcome economic impacts.
'Yeah! That's right!' say the fossil fuel brigade. 'You go down the road towards 100%
renewables and you'll have bankrupt nations like Venezuela all over the industrialized world,
and civilization will break down and there'll be riots in the streets and before you know it we'll
all be back living in mud huts and walking around barefoot chucking spears at anything
unlucky enough to wander past us on its way home!' So is that true? Is it really a huge
economically existential risk to go headlong down the road towards full decarbonisation?
Are we really cutting off our nose to spite our face, as the naysayers would have us believe?
Hello and welcome to Just Have a Think. Integrated Assessment Models, or IAMs, are an attempt by our
global policymakers to throw a bunch of real world variables into one big melting pot,
mix them together, and then pull some sort of socioeconomic and climate related projections
out of the resulting data soup. The variables chosen can vary from model to model, but
they all include economic processes and processes producing greenhouse gases. And many of them also
sprinkle in other aspects of human development, like governance and regulation, infrastructure,
education and health. And that's where the integration part of the title comes from.
The assessments coming out of the mix don't pretend to accurately predict the future,
though. They really just offer a range of possible scenarios that lawmakers can then use to make
their policy judgments on behalf of you and me. A couple of recently published research papers,
both led by Michael Grubb of the Bartlett School of Energy Environment and Resources at University
College London, have analyzed how these IAM models work, in an attempt to better understand how
accurately they've been representing the true cost of what the boffins called 'emissions abatement',
and therefore whether these models have been influencing the right decision making in our
wise and noble leaders. Most integrated assessment models tend to be quite good at including factors
that stimulate innovation at the front end of the process. Things like research and development
funding that gradually push new technologies along and help them come into existence. What they're
not so good at factoring in is the variables on the other side of the supply and demand equation.
The unknown unknowns if you like. The things that can suddenly expand and improve existing markets,
or even create completely new markets that nobody had even thought of.
So the researchers on this paper trawled through no fewer than 228 previous real-world studies
of these so-called demand pull factors in our global energy systems going back more than
half a century. What they found was in the key sectors of industry electricity and transport,
demand or market pull forces like carbon prices and other cost incentives drove a greater increase
in patents for novel designs than technological push forces like basic research and development.
They also found, perhaps unsurprisingly, that in pretty much all the technologies they studied,
costs declined as deployment increased. And that set up a sort of virtuous feedback loop
that often drove exponential expansion into a particular technology. In the
words of the researchers 'overall innovation is cumulative, multi-faceted and self-reinforcing'.
In its recently published report called a Roadmap for the Global Energy Sector, the International
Energy Agency, or IEA, shows an increase in clean technologies over the coming decades. And in fact
it drew sharp criticism from the fossil fuel industry for its suggestion that there should
be no new investments in coal plants and no new oil and gas fields approved for development
with immediate effect. But even so, the IEA still suggests that fossil fuels will make up about 20%
of global electricity generation even in 2050 when we're supposed to be a net zero emissions world.
Based on its in-depth analysis the IEA provides a couple of projections for overall emissions
reductions by the middle of this century. One of them, called the Announced Pledges Case, or APC,
apparently represents their optimistic view of our world in 2050. The other projection, which
they call the Stated Policy Scenario, or STEPS, reflects a rather more pessimistic outlook. Based
on existing legislation, both those scenarios though show a pretty big difference between
the emissions drop we need and the emissions drop we're likely to get. To make up for that deficit
the IEA, and for that matter just about every other major agency in the world including the
Intergovernmental Panel on Climate Change, all say that the world will have to adopt
carbon capture technologies capable of sucking tens of billions of tons of CO2
out of our atmosphere each year and storing it somewhere safe and secure forever. There are a
few companies currently working in that field, capturing a few thousand tons of CO2 per year,
but there's absolutely no certainty at all that those capture and storage technologies can really
be ramped up by a factor of thousands in a quick enough time scale to really make a difference.
And there's no guarantee that the captured carbon dioxide will genuinely be sequestered
and not converted into hydrocarbons that can then be re-burnt as fuels instead - something that is,
after all, a very economically tempting prospect for the commercial companies involved. And even if
we do find somewhere large enough to store many gigatons of CO2, like in depleted oil and gas
seams under the north sea for example, which is a project currently being pursued here in Europe,
we don't really know with absolute certainty that the gas will stay put or whether it'll leach out
into the water causing yet more acidification or eventually even degas back up into the atmosphere.
So if these major international agencies are to be believed, then by not acting much more
aggressively to reduce emissions in the near term - like the next few years- then we're really kind
of stumbling blindly into an unknown future with unknown long-term economic impacts and
environmental consequences. By the way, if you're keen to delve deeper into the IEA report then I
can highly recommend following the link up there to jump over to a great up and coming climate
communication channel called the Beckisphere, where Becky goes into much more of the detail
on all the data sources that the IEA used to draw their conclusions. But then we've got this guy,
who I suspect many of you already know well. He's called Tony Seba, and he's the founder of
an energy consultancy called RethinkX. I've been keeping an eye on their publications for a couple
of years now and their analysis is disrupting the way that markets perceive the risks involved
in ignoring the rapid rise of renewables like wind and solar coupled with energy storage. In
its latest research, RethinkX has revealed a large and rapidly expanding global financial bubble
that they say exists around conventional coal, gas, nuclear, and even hydropower energy assets.
They argue that this bubble has in part been created by mainstream energy analysis from the
likes of the IEA and all these other very well respected mainstream organizations,
all of whom - according to Tony Seba and his team - have been significantly underestimating
the industry standard comparison tool called the Levelized Cost of Electricity, or LCOE, from
conventional power plants. That's because they assume those plants will be able to successfully
sell the same quantity of electricity every year for at least the next couple of decades,
despite the fact that in reality their utilization potential will continue to decrease as competition
from near zero marginal cost solar wind and energy storage continues to grow exponentially worldwide.
Here in the UK the capacity factor of our coal plants has more or less completely collapsed,
dropping from 58 percent in 2013 to just 8% in 2019. The average capacity factor of coal in
the United States has fallen from 67% in 2010 to 40% percent today, partly because of the fracking
boom, but increasingly now because of solar wind and batteries. Nevertheless, the US Energy
Information Administration numbers still assume that coal power plants entering service today,
and even those being commissioned in 2035, will have a capacity factor of 85%
for their entire operational lifetime. That allows them to show the LCOE of those plants
as about 7.5 cents per kilowatt hour. But if you plug in the real capacity numbers,
which RethinkX suggests will be more like 10% by 2035, not 85%, then the cost of electricity
from those plants will be more than 10 times higher than the US EIA's published estimate.
Because LCOE figures and asset valuations are very sensitive to these capacity factor parameters,
conventional energy assets have been made to look much more attractive than they actually
are, which means they've managed to bring in far more investment
than they should have done. According to RethinkX, the actual number is more than 2.2 trillion
dollars of investment in fossil and nuclear energy in the global electric power sector since 2010.
As Tony Seba points out "Investment in an asset class above and beyond what the fundamental value
can return, based on shared and widespread false assumptions, is the very definition of a financial
bubble". The full RethinkX analysis shows how the disruption of the energy market from solar,
wind, and battery storage will rapidly drive the capacity factors of all conventional coal,
gas, nuclear, and hydro power plants towards zero over the rest of this decade, making the majority
of them financially unviable, and their assets stranded sometime around 2030. And that means if
governments don't confront the issue right now and put in place very strong policies to manage
the decline of these power sources in an orderly manner, while at the same time facilitating the
widespread rollout of the unsubsidized renewables that will replace them, then they may well find
themselves having to make market distorting interventions in the future to prevent electricity
supply shortfalls in their national grid systems. And by the way, those investors I mentioned
earlier aren't just venture capitalists who can afford to lose a few billion here and there,
they also include institutional pension funds and other asset managers representing ordinary
folks like you and me who might find themselves holding stranded assets, not only in the power
plants themselves, but also in the infrastructure that supports them, like pipelines and ports and
railways. The future of global energy provision could be bright if the right decisions get made
by our current national administrations now. But that future could quite literally be very dark
if those policy makers fail to grasp what's really going on right under their noses. I'm quite sure
this one will generate some very strong views on both sides of the argument - I wouldn't have it
any other way of course! So if you feel the need to chime in with your feedback or experiences
then dive down to the comment section below and leave your thoughts there.
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have a great week, and remember to just have a think. See you next week.
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