“What’s Actually Happening?”
My brain is exploding with confusion and self-doubt about the effects of climate change.
Like you, I am bombarded with differing news reports, public commentary, political actions framed in Washington, and environmentalists about the general subject of climate change and the growing worry, or disinterest, about CO2 in our atmosphere. (Example: reported last week, CO2 levels at Hawaii’s Mauna Loa Observatory averaged 414.8 parts per million in May. This level has never been seen in human history and is also higher than in millions of years.) MIT Technology Review just published an issue labeled “Welcome to Climate Change.” In effect, their view is that it may already be probable that the 1.5 C temperature increase by 2050, the high bar set by the Paris Agreement, is already out of reach. Their emphasis is on what mankind must do to survive it. On the other hand, in the United States, the current government claims climate science is bogus, that it is all greatly exaggerated, and also that, in any case, homo sapiens have little to do with it.
Sometimes my brain really hurts. I have peers, generally smart, successful people, who look me in the eye and say it is a made up problem. I have always thought that supporting alternative energy was at the minimum a sound insurance policy. Even if you doubted the science, wouldn’t you want to insure against the risk that the thinking underlying the Paris Agreements is based on reliable science. In addition, we can actually measure both the source and content of the CO2 in our atmosphere. It seems that the overwhelming majority of scientist believe that more CO2 is a bad thing, and that at certain levels, apparently easily obtainable without a dramatic conversion to renewables, it would be calamity. But a few powerful political leaders say this is a hoax, perpetuated by China.
Well, I stumbled onto some realities that I think are real eye openers. And regardless of where you stand, I think you might find this information comforting. The information I am presenting is about both the present and the future. With regard to the present, the sources of the data are all very respectable entities. But since these data describe things that have already happened, you can go back and do your own research to see if you can debunk any of the numbers. With regard to the future, we have no data about the future. We only have forecasts, or projections, or extensions, or guesses. But we regularly make profound societal decisions based on such forecasts. My purpose here is to provide an accurate sense of things. This is the world that is emerging, though year to year activity may differ quite considerably. (A great source for macro data on energy use and production, by category, is the International Energy Agency (IEA), who’s member Countries and entities represent 75% of global energy consumption and half of its production.)
Let me start with a few summary observations. First, with regard to the seriousness of CO2 content in our atmosphere, overwhelmingly, the nations of the world are taking this seriously and implementing concrete steps to confront it. Second, the technologies underlying alternative energy have advanced tremendously in only the past fifteen years, a trend line which is expected to continue. Third, solar and wind energy are no longer a boutique alternative source of energy. Rather they are a hard competitor to fossil fuels, if not superior, even when not receiving government subsidies. Fourth, this technology/source/economic conversion is unstoppable and those saying otherwise are simply not paying attention. Fifth, there is no major group opposing this shift, even including major oil companies. One reason for this is that fossil fuels are going to be needed in a complimentary role, at huge volumes, for decades and decades. If the huge energy companies cannot profitably adjust their businesses in three and a half decades they do not deserve to be in it. Sixth, all of these current trends need to be very significantly strengthened to meet the CO2 atmospheric/temperature goals for 2050 that many governmental and non-governmental entities have established. But, when assessing where we are, that goal looks less like science fiction. Seventh, it is hard to escape a sense that making this conversion will become the largest investment undertaking in world history. So exactly where are we?
It is useful to think about electricity when you think about energy. Of course, there are other ways energy is manufactured and used, for example, burning fossil fuel as gasoline. But power is a great place to start because sustainability goals have power playing a bigger and bigger role in the production of global energy.
Using 2016 data, 38% of electricity is still produced burning coal. 23% is natural gas. 17% is hydro. 10% is nuclear. Wind and solar is 6%. Oil is 4%. Biomass and waste brings up the rear at 2%. However, note here that an interesting thing has happened during the past fifteen years. 23% of global electricity – hydro, wind and solar – is already in the sustainable, clean fuel category. Further, nuclear is 10% and while it has significant operating risks and waste disposal challenges, it does not create CO2. Even further, natural gas is thought to be 50% less polluting than coal. So, 33% of electricity production today does not load CO2 into our atmosphere and another 23% is a major improvement in that regard over where we were fifteen years ago.
Here’s what is really interesting. There are two major technologies used for generating solar power. One is called CSP, which concentrates the energy of the sun on mirrors, heats things up, and turns turbines. The other is called PV, or photovoltaic, which is a better technology. When the sun shines it causes a chemical reaction within the solar cells (photovoltaic material) turning the suns protons into electrons, which become electricity. Since 2009, the cost of producing solar PV has dropped 89%, and now costs about $50 per LCOE (levelized cost of energy), unsubsidized. Read that last word again. (According to Futurism, using information from Lazard, this $50 per LCOE is now equal to or better than coal, and the cost is only going to fall further.)
Costs have dropped because of technological innovation, scale, and process improvements. There have also been significant cost improvements in the production of wind generated energy, which seems to now range between $40 to $60 per LCOE. Less than 20 years ago, about 1 Gigga Watt (GW) of electrical power was brought on-board globally from wind and solar. At the same time, 1995, 51 GW of coal and gas infrastructure was produced. That apple cart has flipped over. In 2017, 138 new GW of energy were brought on board from wind and solar, and only 73 GW from coal and gas. Sustainables outpaced oil and gas at a rate of 2:1. And the distance between the two is projected to grow much wider. The projected global investment in wind and solar for 2018 is $332 billion. In fact, new investment in renewables has about averaged $300B per year since 2010. Currently, wind and solar is dominating global investment in new power plants.
Cost improvement is not the only factor contributing to this shift, though it is surely the strongest for private investment in power generation. But the shift in new investment is also driven by global urgency in the demand for clean energy. That is, despite what you hear from some pundits, the nations of the world are pushing hard on clean energy, with 170 countries having renewable energy targets. 195 Countries have signed on to the Paris agreement. Governments and utilities are actually raising what were lofty goals. The EU has raised its goal of power generation from renewables from 27% to 32% by 2035. California, the fifth or so largest economy in the world, has raised its’ goal of power generation from renewables from 50% by 2035 to 100% by 2045. These are real policies, codified into law.
Inside the U.S., the biggest demand for renewable energy comes from state utilities. Further, huge corporations across the world are also demanding clean energy. Why? First, they are now able to lock in clean energy prices for years from the providers of hard core renewable infrastructure. Second, many are driven by the views of their shareholders who believe the climate science. There is a program out there called RE 100, which is a corporate pledge to get 100% of a firm’s electricity from renewables. 167 major companies have taken this pledge and the likes of Apple, Microsoft, Starbucks, and Intel claim to have already met this goal. In 2018, 13.4 GW of power purchase agreements were signed, double the number in 2017. Such a source of demand was practically nonexistent ten years ago.
Today, wind and solar provide approximately 1100 GW globally. If the $300B per year annual investment were to continue for the next three decades, wind and solar would deliver about 6000 GW by 2030, and about 10,000 GW by 2050. In fact, IEA forecasts that the global demand for clean energy will far exceed that number.
20% of global energy is consumed as electricity. Energy pundits expect that to grow significantly. One of the biggest trends in global energy is electrification. One example of this is the conversion anticipated from cars and buses. (In case you have not noticed, the auto industry, for example GM, is spending money as if they believe that electricity is eventually going to drive a huge number of cars and buses.) Even oil and gas majors are jumping on board. Royal Dutch Shell, a world leader among the majors, now derives one-third of its revenue from gas and new energy. Its investments in renewables is between 4:1 and 8:1 of its investments in fossil fuels. (The Guardian)
ENI, the $65 billion Italian energy company is now advertising in National Geographic. Their theme: “Creating Value through the Energy Transition.” Alongside the biggest energy companies in the world, ENI set up the Oil and Gas Climate Initiative (OGCI), which aims to fight climate change in the Upstream Energy sector. This is a focus on decarbonization. In their advertisement they list as major initiatives renewbles projects (heavy focus on PV solar), sustainability projects, which includes planting 50,000 mangrove trees in Indonesia, and a goal from decarbonization to achieve Upstream Net Zero Emissions by 2030. You don’t advertise in National Geographic if your words are just hype. (The Italian Government owns 30% or more of ENI.)
The economic projections are that by 2050 renewables will equal 64% of global electrical generation. Coal and natural gas will be about 30%, with natural gas becoming a larger share of that 30% every year and, as noted above, it has ½ the carbon intensity of coal generation. The United States is now a net positive natural gas exporter.
One can only imagine how accelerated investments in cost reduction, advancing technologies and strengthened government policies and concrete programs might accelerate the shift away from fossil fuels to renewables. Yes, this will take decades, as solar and wind are intermittent suppliers of renewable energy, as the sun doesn’t shine at night or through dense cloud cover nor does the wind blow all of the time. But, what might technologies bring to battery storage, or to smarter transportation grids, or to more efficient usage, or to larger and more efficient wind turbines, or, as the telecommunication guys have modeled for decades, to the last mile of distribution? And perhaps dominant among all of these factors in terms of cost efficiency is scale. Governments have had a great influence on scale over the past decade.
Do you wonder where the CO2 going into the atmosphere comes from? Globally, 42% comes from electricity and heating, disproportionately more than the energy it produces; 24% from transportation; 19% from industry; and 6% from residential. A goal consistent with the Paris accords is to obtain 86% of global power from renewables within 30-35 years. Of course, that will be a huge shift, and electrification will greatly increase the percentage of world energy created through power generation.
A final point to support the argument that the conversion to renewables is no longer “what if” but rather “how to” is to examine another huge shift. This is between the investment dollars going to companies that manufacture components, such as turbines, solar panels, or companies that install, fix and maintain installed equipment. Now the big investment play is with renewable energy infrastructure companies, such as companies that produce and distribute electricity. For example, Warren Buffett’s Berkshire Hathaway owns BHE Renewables, which has interests in many power projects and alone has invested over $2 B in the renewable energy landscape. The world’s largest utility company, Next ERA Energy, a U.S. company based in Florida, is the largest generator of wind and solar globally. It has one of the highest commitments to sustainability of any infrastructure company in the world, and it has been rewarded with a market cap of over $80 B.
The demand for electrical power is on an accelerating curve just about everywhere. Thus, once an infrastructure player makes a commitment to renewables there is virtually no issue about whether there will be demand for its product. The changing economics, the decreasing costs, the growing force of governments, and corporate buyers have created such a stable and growing demand for renewable energy at a price point that enables competitive profit that there are now over 70 listed renewable infrastructure companies, most of them in Europe or the U.K.
My take away from all of this is that when my grandkids reach my age they are going to get almost all of their electricity from renewable sources, and that most of the energy they consume will be renewable. Economics is largely driving this. The naysayers are fighting the wrong fight. Will this happen fast enough to put off disastrous impacts of climate change caused by CO2 build up? Not at current rates of investment. Will this happen fast enough that people will almost forget that there was hysteria in 2019 about climate change? Only if the science is way too negative. Will there be accompanying technology innovations, especially in the area of carbon recapture, that help control CO2 in the atmosphere? Articles in MIT Technology review take carbon recapture seriously. I don’t know those answers. But, while we hear about the “Green New Deal” dialogue, sort of climate change worry as a religion, this shift is now being materially driven by economic logic, favorable investment returns over the very long run, and governments who know the science is good science and are creating real policies and programs to address the issues.
So when you evaluate political positions from either side on climate change perhaps you can factor into your thinking some of this information. If Biden or Warren tell you they want to invest $1.5 to 3.0 trillion into renewables over ten years you should ask them to clarify where they are going to spend this money. Throwing money at this issue will not solve very much. That phase is largely over. The results from Obama’s $90 billion R & D seeding of sustainable technologies within the so-called stimulus bill were probably much better than expected. And of course, you must always have continuing R & D when faced with addressing mammoth industrial/technological enterprises. But, once you enter the operating realm – the revenue creating and profit creating realm – you must have targeted investments against very polished economic goals. You must have market forces that cause bad ideas to fail. Because there will be a lot of bad ideas. The ideologues from either side of the spectrum must be rejected. God help us if investment resource allocation is disproportionately based on political values or heartfelt ideology. The numbers are way too big not to allow a corrective mechanism – the market – to play a major role.
It looks like private investment in 2018 was way north of $300 billion and it is likely to increase. The 70 some odd infrastructure providers will probably be twice that in five years. The 167 corporations who have signed on for RE 100 will probably triple during the next decade. However, in order to meet the goals of the Paris Agreement some credible sources argue that the investment may need to be 3X the projected average $300B per year. Government encouragement, if not economic stimulation, certainly has a role to play. But, governments need to be very careful and very precise about where they stimulate or subsidize private investment.
On the other hand, when you hear that global warming is a Chinese hoax you need to think about the assumptions you must make in order to believe this claim. As an example, that Chinese investment into renewables, which leads the world in many areas, is all based on their belief that they can fool the world. That almost 200 governments are drinking the cool-aid and carelessly and needlessly pushing their societies to renewables. That over $300 billion in global investment dollars into renewable components and infrastructure is being made by very stupid people. That the investment dollars going to GW electrical production from renewables, which was 2X in 2017 against that invested into coal and gas, are somehow totally misguided. That China, the largest market for power investments with the largest societal urgency for expanded power, still disproportionately relying on coal, would be materially shifting away from coal to renewables, simply in order to strengthen their hoax.
The simple facts, for a host of reasons, seem to support the conclusion that world power generation is saying goodbye to fossil fuels, especially coal, less so, natural gas, and inextricably converting over to renewables and, in this area, the U.S. is even leading the way with its 15% increase in solar and wind production in 2018. Further, power generation will consolidate much of the energy produced from other sources because of electrification and other forces. This is a good thing and a seismic shift on a global level, since renewables have the greatest fit with power generation.
This is the bottom line. There is a huge and growing global demand for energy. Indeed, economic development is almost a function of energy. The demand will grow enormously in China, India, much of Latin America, and perhaps overwhelmingly, in Africa. There is a huge and growing demand for electrical power at the right cost/price ratio, almost an insatiable demand. It is inconceivable to me that this sense of the global demand curve could be exaggerated. This is the first thing that investors must believe before expanding the supply. Beyond the demand/supply relationship, the biggest economic risk may be about timing. In order for unsubsidized investments in sustainable electrical power to meet long term return on capital requirements the timing must be right. Cost estimates for new infrastructure need to be accurate. This means two things. First, the technical capability for the components and the infrastructure to perform as it’s supposed to must be assured. Scientific breakthroughs are going to be required. But investors will not capitalize the needed projects if only 80% of the required technical capability exists. Second, with respect to infrastructure capability, construction management and process management must be as good as it can get. The days of accepting projects that come with investment costs at 5X, 10X, or 15X of estimates are over. I think the convergence toward sustainable energy will be as much, if not more, of a management challenge than a technological challenge. In the end, it will require a level of sophistication with regard to business-government-technology integration that perhaps has never been seen.
A final thought. If the science is spot on, and I assume it is close, our future will depend on our ability to work the climate issue from both sides: stop dumping so much new CO2 into the atmosphere, i.e., work toward non carbon creating sources of energy as discussed herein, and figure out how we can pull CO2 out of the atmosphere. In some respects, the market may help us move toward sustainability, which is the main focus of this essay.
Given what we know, it is hard to conceive how the market will drive us toward decarbonization. That work may need to be disproportionately led by the public sector. A recent study by the Swiss Federal Institute of Technology in Zurich reported by the Associated Press concluded that “the most effectrive way to fight global warming is to plant lots of trees, a trillion of them, maybe more.” The study’s co-author, Thomas Crowther, said that “this is the cheapest climate change solution and the most effective.” (A Stanford University environmental scientist Chris Field, who was not involved in the study, said the calculations made sense.) Trees take a great deal of carbon out of the atmosphere. The study reported that “over the decades” – hardly a precise time measure – “those new trees could suck up 830 billion tons of heat trapping carbon dioxide from the atmpophere.” (For sake of reference, it is estimated that global emissions pumped 37.1 metric tons of CO2 into the atmosphere in 2018. Thus, the full complement of trees would absorb 22 years worth of global emission at the 2018 rate, the highest in recorded history.) This is why so many interests have been pushing back on the deforestation of the Brazilian rain forests, or forests anywhere. In effect, this study recommends about a 50% increase in global trees, close to 1.5 trillion. Of course, nothing about this will be easy. Further, they caution that planting trees is not a substitute for weaning the world from burning oil, coal, or gas. The problem needs to be attacked from both sides.
My brain is exploding with confusion and self-doubt about the effects of climate change.
Like you, I am bombarded with differing news reports, public commentary, political actions framed in Washington, and environmentalists about the general subject of climate change and the growing worry, or disinterest, about CO2 in our atmosphere. (Example: reported last week, CO2 levels at Hawaii’s Mauna Loa Observatory averaged 414.8 parts per million in May. This level has never been seen in human history and is also higher than in millions of years.) MIT Technology Review just published an issue labeled “Welcome to Climate Change.” In effect, their view is that it may already be probable that the 1.5 C temperature increase by 2050, the high bar set by the Paris Agreement, is already out of reach. Their emphasis is on what mankind must do to survive it. On the other hand, in the United States, the current government claims climate science is bogus, that it is all greatly exaggerated, and also that, in any case, homo sapiens have little to do with it.
Sometimes my brain really hurts. I have peers, generally smart, successful people, who look me in the eye and say it is a made up problem. I have always thought that supporting alternative energy was at the minimum a sound insurance policy. Even if you doubted the science, wouldn’t you want to insure against the risk that the thinking underlying the Paris Agreements is based on reliable science. In addition, we can actually measure both the source and content of the CO2 in our atmosphere. It seems that the overwhelming majority of scientist believe that more CO2 is a bad thing, and that at certain levels, apparently easily obtainable without a dramatic conversion to renewables, it would be calamity. But a few powerful political leaders say this is a hoax, perpetuated by China.
Well, I stumbled onto some realities that I think are real eye openers. And regardless of where you stand, I think you might find this information comforting. The information I am presenting is about both the present and the future. With regard to the present, the sources of the data are all very respectable entities. But since these data describe things that have already happened, you can go back and do your own research to see if you can debunk any of the numbers. With regard to the future, we have no data about the future. We only have forecasts, or projections, or extensions, or guesses. But we regularly make profound societal decisions based on such forecasts. My purpose here is to provide an accurate sense of things. This is the world that is emerging, though year to year activity may differ quite considerably. (A great source for macro data on energy use and production, by category, is the International Energy Agency (IEA), who’s member Countries and entities represent 75% of global energy consumption and half of its production.)
Let me start with a few summary observations. First, with regard to the seriousness of CO2 content in our atmosphere, overwhelmingly, the nations of the world are taking this seriously and implementing concrete steps to confront it. Second, the technologies underlying alternative energy have advanced tremendously in only the past fifteen years, a trend line which is expected to continue. Third, solar and wind energy are no longer a boutique alternative source of energy. Rather they are a hard competitor to fossil fuels, if not superior, even when not receiving government subsidies. Fourth, this technology/source/economic conversion is unstoppable and those saying otherwise are simply not paying attention. Fifth, there is no major group opposing this shift, even including major oil companies. One reason for this is that fossil fuels are going to be needed in a complimentary role, at huge volumes, for decades and decades. If the huge energy companies cannot profitably adjust their businesses in three and a half decades they do not deserve to be in it. Sixth, all of these current trends need to be very significantly strengthened to meet the CO2 atmospheric/temperature goals for 2050 that many governmental and non-governmental entities have established. But, when assessing where we are, that goal looks less like science fiction. Seventh, it is hard to escape a sense that making this conversion will become the largest investment undertaking in world history. So exactly where are we?
It is useful to think about electricity when you think about energy. Of course, there are other ways energy is manufactured and used, for example, burning fossil fuel as gasoline. But power is a great place to start because sustainability goals have power playing a bigger and bigger role in the production of global energy.
Using 2016 data, 38% of electricity is still produced burning coal. 23% is natural gas. 17% is hydro. 10% is nuclear. Wind and solar is 6%. Oil is 4%. Biomass and waste brings up the rear at 2%. However, note here that an interesting thing has happened during the past fifteen years. 23% of global electricity – hydro, wind and solar – is already in the sustainable, clean fuel category. Further, nuclear is 10% and while it has significant operating risks and waste disposal challenges, it does not create CO2. Even further, natural gas is thought to be 50% less polluting than coal. So, 33% of electricity production today does not load CO2 into our atmosphere and another 23% is a major improvement in that regard over where we were fifteen years ago.
Here’s what is really interesting. There are two major technologies used for generating solar power. One is called CSP, which concentrates the energy of the sun on mirrors, heats things up, and turns turbines. The other is called PV, or photovoltaic, which is a better technology. When the sun shines it causes a chemical reaction within the solar cells (photovoltaic material) turning the suns protons into electrons, which become electricity. Since 2009, the cost of producing solar PV has dropped 89%, and now costs about $50 per LCOE (levelized cost of energy), unsubsidized. Read that last word again. (According to Futurism, using information from Lazard, this $50 per LCOE is now equal to or better than coal, and the cost is only going to fall further.)
Costs have dropped because of technological innovation, scale, and process improvements. There have also been significant cost improvements in the production of wind generated energy, which seems to now range between $40 to $60 per LCOE. Less than 20 years ago, about 1 Gigga Watt (GW) of electrical power was brought on-board globally from wind and solar. At the same time, 1995, 51 GW of coal and gas infrastructure was produced. That apple cart has flipped over. In 2017, 138 new GW of energy were brought on board from wind and solar, and only 73 GW from coal and gas. Sustainables outpaced oil and gas at a rate of 2:1. And the distance between the two is projected to grow much wider. The projected global investment in wind and solar for 2018 is $332 billion. In fact, new investment in renewables has about averaged $300B per year since 2010. Currently, wind and solar is dominating global investment in new power plants.
Cost improvement is not the only factor contributing to this shift, though it is surely the strongest for private investment in power generation. But the shift in new investment is also driven by global urgency in the demand for clean energy. That is, despite what you hear from some pundits, the nations of the world are pushing hard on clean energy, with 170 countries having renewable energy targets. 195 Countries have signed on to the Paris agreement. Governments and utilities are actually raising what were lofty goals. The EU has raised its goal of power generation from renewables from 27% to 32% by 2035. California, the fifth or so largest economy in the world, has raised its’ goal of power generation from renewables from 50% by 2035 to 100% by 2045. These are real policies, codified into law.
Inside the U.S., the biggest demand for renewable energy comes from state utilities. Further, huge corporations across the world are also demanding clean energy. Why? First, they are now able to lock in clean energy prices for years from the providers of hard core renewable infrastructure. Second, many are driven by the views of their shareholders who believe the climate science. There is a program out there called RE 100, which is a corporate pledge to get 100% of a firm’s electricity from renewables. 167 major companies have taken this pledge and the likes of Apple, Microsoft, Starbucks, and Intel claim to have already met this goal. In 2018, 13.4 GW of power purchase agreements were signed, double the number in 2017. Such a source of demand was practically nonexistent ten years ago.
Today, wind and solar provide approximately 1100 GW globally. If the $300B per year annual investment were to continue for the next three decades, wind and solar would deliver about 6000 GW by 2030, and about 10,000 GW by 2050. In fact, IEA forecasts that the global demand for clean energy will far exceed that number.
20% of global energy is consumed as electricity. Energy pundits expect that to grow significantly. One of the biggest trends in global energy is electrification. One example of this is the conversion anticipated from cars and buses. (In case you have not noticed, the auto industry, for example GM, is spending money as if they believe that electricity is eventually going to drive a huge number of cars and buses.) Even oil and gas majors are jumping on board. Royal Dutch Shell, a world leader among the majors, now derives one-third of its revenue from gas and new energy. Its investments in renewables is between 4:1 and 8:1 of its investments in fossil fuels. (The Guardian)
ENI, the $65 billion Italian energy company is now advertising in National Geographic. Their theme: “Creating Value through the Energy Transition.” Alongside the biggest energy companies in the world, ENI set up the Oil and Gas Climate Initiative (OGCI), which aims to fight climate change in the Upstream Energy sector. This is a focus on decarbonization. In their advertisement they list as major initiatives renewbles projects (heavy focus on PV solar), sustainability projects, which includes planting 50,000 mangrove trees in Indonesia, and a goal from decarbonization to achieve Upstream Net Zero Emissions by 2030. You don’t advertise in National Geographic if your words are just hype. (The Italian Government owns 30% or more of ENI.)
The economic projections are that by 2050 renewables will equal 64% of global electrical generation. Coal and natural gas will be about 30%, with natural gas becoming a larger share of that 30% every year and, as noted above, it has ½ the carbon intensity of coal generation. The United States is now a net positive natural gas exporter.
One can only imagine how accelerated investments in cost reduction, advancing technologies and strengthened government policies and concrete programs might accelerate the shift away from fossil fuels to renewables. Yes, this will take decades, as solar and wind are intermittent suppliers of renewable energy, as the sun doesn’t shine at night or through dense cloud cover nor does the wind blow all of the time. But, what might technologies bring to battery storage, or to smarter transportation grids, or to more efficient usage, or to larger and more efficient wind turbines, or, as the telecommunication guys have modeled for decades, to the last mile of distribution? And perhaps dominant among all of these factors in terms of cost efficiency is scale. Governments have had a great influence on scale over the past decade.
Do you wonder where the CO2 going into the atmosphere comes from? Globally, 42% comes from electricity and heating, disproportionately more than the energy it produces; 24% from transportation; 19% from industry; and 6% from residential. A goal consistent with the Paris accords is to obtain 86% of global power from renewables within 30-35 years. Of course, that will be a huge shift, and electrification will greatly increase the percentage of world energy created through power generation.
A final point to support the argument that the conversion to renewables is no longer “what if” but rather “how to” is to examine another huge shift. This is between the investment dollars going to companies that manufacture components, such as turbines, solar panels, or companies that install, fix and maintain installed equipment. Now the big investment play is with renewable energy infrastructure companies, such as companies that produce and distribute electricity. For example, Warren Buffett’s Berkshire Hathaway owns BHE Renewables, which has interests in many power projects and alone has invested over $2 B in the renewable energy landscape. The world’s largest utility company, Next ERA Energy, a U.S. company based in Florida, is the largest generator of wind and solar globally. It has one of the highest commitments to sustainability of any infrastructure company in the world, and it has been rewarded with a market cap of over $80 B.
The demand for electrical power is on an accelerating curve just about everywhere. Thus, once an infrastructure player makes a commitment to renewables there is virtually no issue about whether there will be demand for its product. The changing economics, the decreasing costs, the growing force of governments, and corporate buyers have created such a stable and growing demand for renewable energy at a price point that enables competitive profit that there are now over 70 listed renewable infrastructure companies, most of them in Europe or the U.K.
My take away from all of this is that when my grandkids reach my age they are going to get almost all of their electricity from renewable sources, and that most of the energy they consume will be renewable. Economics is largely driving this. The naysayers are fighting the wrong fight. Will this happen fast enough to put off disastrous impacts of climate change caused by CO2 build up? Not at current rates of investment. Will this happen fast enough that people will almost forget that there was hysteria in 2019 about climate change? Only if the science is way too negative. Will there be accompanying technology innovations, especially in the area of carbon recapture, that help control CO2 in the atmosphere? Articles in MIT Technology review take carbon recapture seriously. I don’t know those answers. But, while we hear about the “Green New Deal” dialogue, sort of climate change worry as a religion, this shift is now being materially driven by economic logic, favorable investment returns over the very long run, and governments who know the science is good science and are creating real policies and programs to address the issues.
So when you evaluate political positions from either side on climate change perhaps you can factor into your thinking some of this information. If Biden or Warren tell you they want to invest $1.5 to 3.0 trillion into renewables over ten years you should ask them to clarify where they are going to spend this money. Throwing money at this issue will not solve very much. That phase is largely over. The results from Obama’s $90 billion R & D seeding of sustainable technologies within the so-called stimulus bill were probably much better than expected. And of course, you must always have continuing R & D when faced with addressing mammoth industrial/technological enterprises. But, once you enter the operating realm – the revenue creating and profit creating realm – you must have targeted investments against very polished economic goals. You must have market forces that cause bad ideas to fail. Because there will be a lot of bad ideas. The ideologues from either side of the spectrum must be rejected. God help us if investment resource allocation is disproportionately based on political values or heartfelt ideology. The numbers are way too big not to allow a corrective mechanism – the market – to play a major role.
It looks like private investment in 2018 was way north of $300 billion and it is likely to increase. The 70 some odd infrastructure providers will probably be twice that in five years. The 167 corporations who have signed on for RE 100 will probably triple during the next decade. However, in order to meet the goals of the Paris Agreement some credible sources argue that the investment may need to be 3X the projected average $300B per year. Government encouragement, if not economic stimulation, certainly has a role to play. But, governments need to be very careful and very precise about where they stimulate or subsidize private investment.
On the other hand, when you hear that global warming is a Chinese hoax you need to think about the assumptions you must make in order to believe this claim. As an example, that Chinese investment into renewables, which leads the world in many areas, is all based on their belief that they can fool the world. That almost 200 governments are drinking the cool-aid and carelessly and needlessly pushing their societies to renewables. That over $300 billion in global investment dollars into renewable components and infrastructure is being made by very stupid people. That the investment dollars going to GW electrical production from renewables, which was 2X in 2017 against that invested into coal and gas, are somehow totally misguided. That China, the largest market for power investments with the largest societal urgency for expanded power, still disproportionately relying on coal, would be materially shifting away from coal to renewables, simply in order to strengthen their hoax.
The simple facts, for a host of reasons, seem to support the conclusion that world power generation is saying goodbye to fossil fuels, especially coal, less so, natural gas, and inextricably converting over to renewables and, in this area, the U.S. is even leading the way with its 15% increase in solar and wind production in 2018. Further, power generation will consolidate much of the energy produced from other sources because of electrification and other forces. This is a good thing and a seismic shift on a global level, since renewables have the greatest fit with power generation.
This is the bottom line. There is a huge and growing global demand for energy. Indeed, economic development is almost a function of energy. The demand will grow enormously in China, India, much of Latin America, and perhaps overwhelmingly, in Africa. There is a huge and growing demand for electrical power at the right cost/price ratio, almost an insatiable demand. It is inconceivable to me that this sense of the global demand curve could be exaggerated. This is the first thing that investors must believe before expanding the supply. Beyond the demand/supply relationship, the biggest economic risk may be about timing. In order for unsubsidized investments in sustainable electrical power to meet long term return on capital requirements the timing must be right. Cost estimates for new infrastructure need to be accurate. This means two things. First, the technical capability for the components and the infrastructure to perform as it’s supposed to must be assured. Scientific breakthroughs are going to be required. But investors will not capitalize the needed projects if only 80% of the required technical capability exists. Second, with respect to infrastructure capability, construction management and process management must be as good as it can get. The days of accepting projects that come with investment costs at 5X, 10X, or 15X of estimates are over. I think the convergence toward sustainable energy will be as much, if not more, of a management challenge than a technological challenge. In the end, it will require a level of sophistication with regard to business-government-technology integration that perhaps has never been seen.
A final thought. If the science is spot on, and I assume it is close, our future will depend on our ability to work the climate issue from both sides: stop dumping so much new CO2 into the atmosphere, i.e., work toward non carbon creating sources of energy as discussed herein, and figure out how we can pull CO2 out of the atmosphere. In some respects, the market may help us move toward sustainability, which is the main focus of this essay.
Given what we know, it is hard to conceive how the market will drive us toward decarbonization. That work may need to be disproportionately led by the public sector. A recent study by the Swiss Federal Institute of Technology in Zurich reported by the Associated Press concluded that “the most effectrive way to fight global warming is to plant lots of trees, a trillion of them, maybe more.” The study’s co-author, Thomas Crowther, said that “this is the cheapest climate change solution and the most effective.” (A Stanford University environmental scientist Chris Field, who was not involved in the study, said the calculations made sense.) Trees take a great deal of carbon out of the atmosphere. The study reported that “over the decades” – hardly a precise time measure – “those new trees could suck up 830 billion tons of heat trapping carbon dioxide from the atmpophere.” (For sake of reference, it is estimated that global emissions pumped 37.1 metric tons of CO2 into the atmosphere in 2018. Thus, the full complement of trees would absorb 22 years worth of global emission at the 2018 rate, the highest in recorded history.) This is why so many interests have been pushing back on the deforestation of the Brazilian rain forests, or forests anywhere. In effect, this study recommends about a 50% increase in global trees, close to 1.5 trillion. Of course, nothing about this will be easy. Further, they caution that planting trees is not a substitute for weaning the world from burning oil, coal, or gas. The problem needs to be attacked from both sides.
