We got a bit of bad news this month from the Mauna Loa observatory in Hawaii
which is where they monitor atmospheric carbon dioxide concentrations.
Apparently we've just tipped over 420 parts per million for the first time in human history.
Now as you probably know, that increase in CO2 concentration is warming our atmosphere and
playing a major role in the catastrophic changes we're witnessing in our climate. A major driver of
CO2 emissions is of course the use of fossil fuels around the world, so one of the burning questions
of our time, so to speak, is just how quickly we can get ourselves off those carbon heavy fuels
and onto more sustainable forms of energy generation that don't release carbon dioxide
at the point of use. At an industry conference called All Energy, held at the Glasgow SEC in May,
the chairman of Shell UK, David Bunch, delivered a speech insisting that natural
gas is an indispensable transition fuel and the only way to effectively wean ourselves off coal.
But a comprehensive study released around the same time by energy industry analysts
Transition Zero paints a very different picture. It suggests a global system in which countries
would actually save money by completely bypassing natural gas and jumping straight from coal to
renewable technologies like solar wind and battery energy storage. So how do they work that out then?
Hello and welcome to Just Have a Think. So I guess you're wondering who Transition Zero are
and why they know better than the chairman of one of the largest fossil fuel producers in the world.
Well they're are not-for-profit organization established in 2020 from a core team of experts
all of whom previously worked at the highly respected independent financial think tank
Carbon Tracker. Their mission is to bring a bit of clarity to the complexity of making like-for-like
comparisons between different utility-scale fuel sources so that the costs involved in moving
from one source to another in different countries around the world can be more accurately assessed.
Believe it or not no such tool previously existed for short-run energy analytics in the industry,
which meant that when it came to assessing the climate impacts of fuel switching
policy makers and investors were effectively flailing around in the dark.
This most recent report is called fuel switching 2.0 and features an index that Transition Zero
called Coal-to-Clean Carbon Price Index or C3PI, which should of course not be confused
with a whinging gold android from Star Wars! "this is madness".
Applying a carbon price to a fuel source already occurs through general trading conditions
or as a result of mechanisms like the Carbon Tax or the EU Emissions Trading Scheme. C3PI
is an open data project that's been specifically designed to assess the carbon price in dollars per
tonne of carbon dioxide needed to cause a switch from coal to gas compared to the carbon price
needed to cause a switch directly from coal to new onshore wind or solar PV plus battery storage.
All the workings and methods that Transition Zero use are set out in a separate report which
uses information from a database of coal plants developed by another analytics organization called
Global Energy Monitor. For existing coal and fossil gas plants the analysis uses a metric known
as Short Run Marginal Cost or SRMC. It includes things like the cost of the fuel itself plus the
variable operations and maintenance costs and any existing carbon costs associated with the plant.
For new build natural gas plants the Levelized Cost of Electricity or LCOE is used. That's a much
more familiar metric to most of us representing the average total cost of building and operating a
power plant over its assumed lifetime. Using those definitions you get a set of equations for working
out the numbers. So if you're planning to swap from existing coal to existing gas then you take
the short run marginal cost or SRMC of gas minus the SRMC of coal and divide that by the difference
in carbon emissions intensity, measured in tons of carbon dioxide per megawatt hour, between the two
fuel types. And if you want to swap from existing coal to a brand new gas-powered facility then you
take the levelized cost of electricity or LCOE of the new gas plant minus the SRMC of coal divided
by the difference in emissions intensities. LCOE analysis only takes into account power generation
though. It doesn't factor in any other added value services to the grid like frequency regulation and
dispatchability. So to provide a more level playing field the cost of battery energy
storage has to be added to the cost of renewables before any comparisons can be made with existing
fossil fuels. So to get a carbon price that justifies a switch from existing coal directly
to renewables you take the LCOE of renewables plus storage, minus the cost of existing coal,
and simply divide that by the carbon emissions intensity of coal, because of course there
are no carbon emissions from the operation of renewables. You get the idea? Now those studious
folks at Transition Zero have crunched all the numbers for 25 different countries using data
taken from the International Energy Agency's World Energy Outlook reports going right back to 2010.
Back then switching from coal to gas looked like an obvious choice at a required carbon price of
only about 20 dollars per tonne of carbon dioxide compared to more than $500 per tonne for a switch
to renewables. But we all know what's happened to the price of wind and solar in the last
decade don't we? And of course that's directly reflected in this chart. As the years roll on
the two lines converge until we reach a crossover point this year as gas prices go completely crazy.
The most recent data points from April 2022 show a required carbon price of 488 dollars per tonne
to switch from coal to gas and minus $44 per tonne to switch from coal to clean renewables. The 2022
average carbon price so far is $235 for coal to gas and -$62 dollars for coal to clean renewables,
representing an extraordinary decline of 99% since 2010. That's a global average of course which is
useful as a general guide to global policy but doesn't show the variation from country to country
so the team drilled down into a second layer of granularity to produce this
historical chart showing the carbon price to switch from coal to clean renewables
in the top 10 countries over the same period. In Europe the cost of switching is now negative as a
result of rising carbon prices from policy reforms to the emissions trading scheme
plus decades of policy support for renewable energy, and of course Russia's invasion of Ukraine
which has caused a big spike in the price of coal. China and the US are world leaders in
renewable energy but they're both still churning out coal at relatively low domestic prices.
So at least at the moment that partially offsets the cost advantages of switching to renewables.
Fuel switch costs in Southeast Asia are influenced by the subsidisation of coal and gas
as well as the fact that renewable energy is still quite a nascent industry
compared to other countries. Japan has one of the highest coal to clean fuel switch prices
as a result of land use constraints and some quite discriminatory regulations
but despite those obstacles there has been a clear deflationary trend in every country which, as the
Transition Zero team points out, must surely cast some doubt on the wisdom of the 615 gigawatts
of gas and 442 gigawatts of coal currently under construction around the world. It's not difficult
to project forward using this data analysis to see that those massive investments are
very likely to become stranded assets well before the end of their operational lifetime. That risk
means that fossil fuel investment cycles are likely to continue to shorten as producers remain
under pressure from investors and policy makers to avoid a catastrophically loss-making future.
Trade bans from places like Indonesia and the EU show how trade is increasingly being used to
support energy security and enforce environmental goals. All those volatile variables in the fossil
fuel markets will probably keep heaping pressure on consumers, businesses and governmental balance
sheets for the foreseeable future. The research team points out that while zero carbon
technologies are not immune to fluctuations in the supply chain they're much less likely to suffer
from the same volatility as fossil fuels because once they're up and running they're just using
the wind and sun to produce power. That means they have near zero marginal costs which in turn must
surely mean that renewables will need to play a crucial role in reducing the impact of the energy
crisis. So how do we get there? Well according to transition zero the most obvious first step would
be to get rid of existing subsidies in coal gas and end user electricity prices. Those distortions
are delaying the implementation of renewables. If you and I had to pay the real cost of powering our
homes using fossil fuels things had changed very quickly indeed. There's also a need for what's
known as cash to close policies. Based on the Transition Zero analysis nearly 3000 coal plants
need to be replaced between now and 2030, and there'll need to be some state assistance
to make sure this happens. And policy support for renewables needs to be ring fenced so that zero
carbon investors don't have to suffer the vagaries of different governments over successive election
cycles on top of the existing technological and market risks they already have to bear. Last but
not least is the thorny issue of permitting. There is clearly political will to increase renewables
capacity around the world but the Transition Zero team argued that permitting is a major bottleneck
slowing deployment and increasing the cost of zero carbon sources of electricity generation.
According to Wind Europe, overly complex rules, grindingly slow procedures and
generally inadequate staffing levels mean that the permitting lead time for onshore wind deployment
can take up to 10 years! That is bonkers and it needs to change very quickly! Now as usual in
my little 12 minute video segments I've only been able to give you a snapshot of the full analysis.
Transition Zero say that as a result of the crazy market volatility we're all experiencing right now
they'll be updating the CP3I index every week for the United States and Europe and once a month for
all the other countries. And of course I'll leave links in the description section below
to that report plus all the other supporting documentation that Transition Zero referenced.
And of course if you've got your own views on how the transition to sustainable energy
should take place then why not jump down to the comments section below and leave your thoughts
there. That's it for this week though. Thanks as always to our amazing Patreon supporters who
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