The key headlines from the latest Irena (International Renewable Energy Agency) report entitled Global Energy Transformation, was that $10 trillion has come off the cost of fixing the climate change problem, due to falls in renewables costs. Our take is somewhat different and we really like what Irena has tried to do.
Essentially it has analyzed out two use cases – one that is business as usual, and it sees the world hitting 2.50C of warming, as renewables continue to become more popular and cheaper, but as governments continue to subsidize their fossil fuel industries and fail to legislate against them. It has compared with this what it calls the REmap case, where it has mapped the use of Renewable Energy in line with the Paris agreement.
The REmap scenario includes the deployment of low-carbon technologies, based largely on renewable energy and energy efficiency, to generate a transformation of the global energy system that limits the rise in global
temperature to well below 2 degrees Celsius above pre-industrial levels.
Those who are still unconvinced by climate change being anthropogenic will not suddenly be convinced by this work, but any sitting on the fence, and many governments are, in the sense that they are worrying what they should do to support fossil fuel industries, should be able to see that if global GDP will actually end up higher and global employment slightly higher, by embracing renewables right now, then why not?
Yes it seems to be true that costs of renewables have come down since Irena last did a calculation like this, but it takes a lot of know how to produce these sums, and while there is not really enough workings to reproduce them in the report it seems convincing. Although some might wonder how much more cost cutting momentum remains in renewables?
Well we suspect that there will be more compromises along the way, and releasing the $15 trillion that Irena says is spent subsidizing fossil fuels each year, is the real target here. Spending at least some of that on subsidizing renewable energy projects or accelerating the transition from fossil fuels, will lead to a far better outcome. Messages like this make it clear to global investors that they will make healthy returns in the renewables sector, at the very least.
But the total transition costs have really only come down from $125 trillion to $115 trillion, a fall of $10 trillion, and that’s just an 8% fall really (in a year). It is hard to factor in further price falls for say wind, especially with the fact of further consolidation in wind turbine manufacture over the past two years. Perhaps wind costs have reached rock bottom, though we suspect not. Much work continues in ways to help wind power attach more directly to electricity grids and to partner with batteries and for the energy produced by them to be used on trading systems, sold wholesale. None of these really make wind power cheaper, just enable it to take more of the global strain. However floating wind farms, still in their infancy may offer a step change in land costs, if maintenance costs can be brought down, and once that market takes off, it could potentially be huge.
In solar there is certainly more significant progress to be made. Not only do grids need to be better able to absorb and account for energy from individual homes and enterprises, but the arrival of bifacial at scale will drop costs something close to 20%, by the simple expedient of producing 25% more energy with only a little more total system cost. These have to be perfected and integrated into the eco-system, before they become the standard fare of energy operators, but that will be this year and next.
We could see that transition cost fall well under the $95 trillion which Irena figures is the current cost of business as usual. It genuinely believes that switching to renewables faster will cost another $15 trillion over and above this to reach a decarbonized energy system by 2050, which it sees as merely a 16% increase from the rate of investment today. That’s certainly possible and first quarter 2019 numbers look like we are getting close to this in one year.
If solar genuinely takes 20% off that number, the two strategies get closer and closer to the same cost – so few government could argue that sticking with a fossil fuel economy makes more sense – it will lead to continued fuel costs, lower GDP and lower employment – so why not change plan. If China and India alone were convinced by this argument, it would lead to a doubling of global renewables spend and lead to the death of coal, and put gas on the back-burner (sic).
The Irena sums go into detail over stranded assets, which are effectively the long lives of coal and gas plant which may have to be cut short to enact the REmap strategy, and suggests that this would be as low as $7.7 trillion, and duly takes it off the upside of the GDP equation.
Irena concludes that for every dollar invested in transforming the global energy system, there is a payoff of at least $3 and potentially more than $7, can be achieved, depending on how you value ting like climate change and the economic disruption it causes, especially from weather damage, droughts and fires.
It strikes us that all forecasts in this industry, and there are many, and we plan to add to them, sit somewhere between these two extremes. 1) Assume that the rate of renewables use is rising at the same rate as the last two years or 2) spend another 16% of renewables and accelerate them to achieve the Paris accord.
Irena already cut its estimate last year for the additional costs needed to meet Paris Accord goals by some 40%. Among its assumptions this time were a greater use of electricity to cut fossil fuel emissions; the addition of 1 billion electric cars on the road (by 2050), and increasing the use of electricity to provide heat and use it to make industrial gases to replace natural gas.
Electricity itself will have to go from being 20% of total energy used, up to 50% by 2050 and obviously a lot more of it would need to come from renewables – one calculation was that 84% of an elevated amount of electricity needs to come from renewables.