Right data, wrong conclusions – as NEF gives us a purely US view

Bloomberg New Energy Finance has published its New Energy Outlook 2019, but it continues to have a skewed, US position on coal and gas, and while the executive summary offers some real insight to energy markets, we get the feeling it is out of kilter with the global Zeitgeist – it fails to accept that the current political scenarios will change – the US will not always be controlled by the Republican party – and fails to gauge the effect of a growing urgency from the public on climate change.

For the most part it thinks along all the right dimensions, but tends to reach some of the wrong conclusions. One reason for this is because it fails to take into account the Osbourne effect –  a social phenomenon of customers canceling or deferring orders for the current soon-to-be-obsolete product as an unexpected drawback of alternative technology soon being available.

Any money still chasing after fossil fuels in the next five years is clearly going to be left with stranded assets which will never fully pay down debt – ruinous for investors, and toxic once it is obvious that renewables is a better place for their money. As countries like Indonesia, become stranded in coal generation, the lack support from partner countries, and feel the moral outrage at their failure to respond to an increasing climate emergency, they will shift their positions.

But first the NEF conclusions – it says cheap renewable energy and batteries will fundamentally reshape the electricity system, but that we only move from a world that is two-thirds fossil fuels in 2018 to two-thirds zero-carbon energy by 2050.

NEF sees 2050 as the beginning of the end for fossil fuels when it is, in fact, coming much sooner. Most electricity plants have a life cycle of 25 to 35 years. We are 32 years from 2050, so almost every piece of generation equipment has to be replaced or refurbished during that time. Today in every instance wind and solar is cheaper than coal or gas. And wind and solar with batteries are able to offer dispatchable energy, and it will only be one or two more years before it is clear to everyone in energy that this is the right way forward. And so 30 years more of investment in renewables will make it increasingly hard to keep even gas plants open.

By 2023/4 every major electricity generator will want to dump ownership of fossil fuel assets, and will take a write down, as those assets will eventually be expected to become stranded at precise points in the future, unable to operate and yet still owing debt. Better to have this hit your balance sheet now by selling it off cheap, than later in a bankruptcy kind of way.

So in that sense NEF is doing fine at outlining linear change at the current rate. What it fails to do is anticipate an accelerating rate of change and the political and social dimensions accentuate.

For instance suggesting that solar will only reach 22% of the world electricity generation by 2050 is to misunderstand how things change. It’s a bit like GM saying that in 2040 most new cars will still have an internal combustion engine, even though governments the world over will make that largely illegal.

Similarly NEF says that about a third of that solar will be deployed behind-the-meter by households and business – and this will account for 5% of world electricity in 2050. It should have looked in its own territory today and note that already the National Grid (British operator operating in Massachusetts and Rhode Island) is rolling out a new program allowing Tesla Powerall owners to leverage their batteries to sell their stored power during peak grid utilization periods.

Initiatives like this are common in Europe where even consumers get a Feed-In Tariff rather than a tax break for selling their excess solar panel electricity to the grid. Over the next ten years grids will adjust so that sales can be made from the consumer in one home, to a neighbor in another – and once that takes off, the USA will dominate with its entrepreneurial instincts taking over.

It is only policy and grid architecture which prevents solar behind the meter becoming 20% or 30% of global electricity, and both policy and architecture will change long before 2050 and in the process wi[pe out the need for peaker plants.

NEF also says that wind will by 2050 generate 26% of the world’s electricity in 2050, compared with 5% today.

All we are complaining about is the idea that while NEF seems to understand that in some market batteries, solar, wind and dynamic demand help us reach more than 80% of generation in some parts of the world, it expects other parts of the world not to change at all.

It does acknowledge what everyone in the industry already knows, which is that hydro and nuclear will stay pretty much where they are due to high costs and long delays in bringing fresh generation to market.

NEF estimates that 359GW of batteries will be needed throughout the power system to help shift excess generation to times when the wind is not blowing and sun is not shining and of course adds the idea that demand response will finally become effective and deeply integrated with renewable energy and agrees that dynamic EV charging will mostly use demand response for timing of the recharge, so not affect the baseload requirements. But if you think, like us that change will happen faster, then that battery estimate may also have to be doubled.

And NEF comes up with the magic investment figure which is supposed to dominate the headlines – that $13.3 trillion of investment is needed to get from where we are today to this less than gleaming future. This amounts to $406 billion for every one of the 32 years it says we have left.

But given that global energy investment was around $1.8 trillion in 2018 and in 2017, we cannot see why this tiny amount – less than a quarter of today’s total investment rate – even warrants mention as “investment.” And if twice as much is spent to get us to an even better place with stronger renewables, that’s still well within the current power economy to pay for it. If governments also vote $billions to “Green New Deal” style accelerators, then expect investors to be asked to do even less. It’s confusing why this is seen as such a huge problem, when it is more or less business as usual.

At least NEF is clear that 77% of this investment goes to renewables, with wind attracting $5.3 trillion and solar $4.2 trillion, and another $843 billion goes to batteries. It says that investments in new fossil fuel plants doesn’t exceed $2 trillion, but the digitization and modernization of grids needing an estimated $11.4 trillion to 2050. We’re comfortable with that. NEF says this investment funds 15,145 GW of new power plants between 2019 and 2050.

It then goes on to analyze out the future scenarios of the US, Mexico, Brazil, China, Japan, Germany, The UK, India, South Korea, Australia, Southeast Asia, Middle East and North Africa and Turkey in more detail. Most of the assessments are realistic and well thought out – but we would argue not all of them.

NEF sees coal collapsing everywhere in the world, except in Asia, and says it peaks globally in 2026. How can it? Another 900 GW of coal plants are likely to become unprofitable in 2019, a similar amount in 2020. Surely not all of them will be subsidized to keep a shrinking pool of coal jobs? Surely coal has already peaked? Yes China, India and Indonesia are building more plants, but the US and Europe are closing them down just as fast already.

One of the issues is this final graph – that NEF continues, like the oil companies, to see the world missing out on the 2 degree target for climate change. They probably have no idea of the amount of harm that would come about by missing that target, because they are forecasters in an oil-business world, and try not to think about climate change. But as we approach that kind of disruption, more and more evidence will be amassed that mankind can and does change the global climate, and less and less resistance will be mounted by climate change deniers and more and more dramatic law changes will occur. The world will not miss that target so its forecasts are wrong.

It is bad enough that oil companies have pushed the idea that only fossil fuels can help this transition, and that we must miss the targets and that’s just life. But going along with oil company apathy and lack of appetite for change is not a forecasters role, they have to show what they believe will happen.

One of the point of views that is hardest to anticipate is the US falling out of love with fracked gas. It is already, and investors are not making money from it. NEF says that gas-fired power will continue to grow just 0.6% per year to 2050, supplying system back-up and flexibility rather than bulk electricity in most markets. If we do not solve issues of flexibility and system back up before 2050, without using Gas, then the energy industry would be in real trouble. And why has GE had so much trouble shipping gas plants over the past five years.

This betrays NEF’s thinking. For the past 5 years the fossil fuel extraction industry has held steadfastly to the idea that gas is the natural replacement for coal, while renewables gets up to speed. But that was purely because of fracking investment – they take that position to preserve their investment, not because it has any kind of logic.

But renewables are already up to speed, so the fallback position the fossil industry has taken is that gas is better at being dispatchable. But a change of the ruling party in the US, and further improvements in grids and in batteries will see this role for gas rapidly disappearing – certainly in ten years, and see renewables have a huge price advantage over gas by then.

So the forecast that gas generating capacity doubles by 2050 has to go out of the window and anyway a growth of 0.6% a year for 32 years is a rise of 21%, not 100% to doubling. Someone did their math wrong there.

NEF says it expects a 37% rise in combined-cycle gas turbines as 506GW will be added, and a 350% increase in peaking gas plants, which account for over 1TW of capacity by 2050. This is wish fulfillment for the fossil companies among the NEF customer base and totally unlikely.

We have already shown that using the grid to get behind the meter energy held in Tesla Powerwalls, can be realized with just a policy change, then why would the US and other Governments allow peaking plants to be built if they are under pressure from climate groups? That’s just not going to happen.

The other two key markets are China and India. NEF believes that China will continue to be the largest market for wind and solar, which together grow from 8% to 48% of total generation by 2050. We feel that China will accelerate renewables once they achieve clear parity in China, which will be this year or next and that much of the nuclear and coal plants growth will evaporate overnight.

NEF suggests that India will grow electricity sixfold to become the second-largest power system in the world by 2044 and insists that 170GW of new coal will come online in the period up to 2050. It is hard to understand why India would build out so much coal, but it is fairly baffling to see why it is building out coal now, so NEF may have this right.

One final point of disagreement is Japan, and how it will slide back into embracing nuclear. It is clear that the government has flip-flopped over this decision ever since it abandoned it in after the Fukushima disaster, but its problem is that it has very little in the way of natural resources and very little land also, but the report fails to mention its plans for floating wind, which are quite aggressive, which deals with both of these problems, energy without consuming land or importing resources – so it will see it through.