Fossil fuels can't compete
EDITOR'S NOTE
All the hysteria in recent years over "ESG" investing and the multi-trillion-dollar "Green New Deal" and Greta Thunberg and so on is obscuring a much more simple economic reality: fossil fuels are becoming uncompetitive.
The transition to renewables is actually happening much faster than expected--in part because they're getting so cheap. Like in Germany, where wind and solar were less than 10% of the grid in the early 2000s, but whose adoption has increased so quickly they now provide nearly 50% of the country's power--a scenario even the optimists didn't originally foresee.
Even in the U.S., renewables are already 12% of energy consumption--and were the only energy sources to grow last year while fossil fuel and nuclear usage outright declined. Wind and solar comprise about half of that, and are growing quickly. Solar rose 22% last year, wind 14%, while the other renewables--hydro, wood waste (biomass), biofuels--have been flattish.
And the market sees this. What matters to investors isn't just overall share, but the marginal change. Coal power plants have been closing like crazy. Even natural gas plants--particularly in California, where renewables are contributing so much power that gas plants are often sitting dormant--risk becoming uncompetitive. This is creating power grid headaches (and the need for more gas and diesel sources) in the near term, but in the long run it's obvious where this is going.
Why would anyone finance a new fossil fuel power plant, with a two- to three-decade operating life, in such circumstances? Just look at coal! As its market share has eroded over the past decade, the industry has been virtually wiped out. More than a third of the U.S. coal fleet has been retired since 2010, resulting in more than 50 bankruptcies.
The largest coal producer, Peabody, warned last November it may file for bankruptcy for the second time in five years. Just Friday, Wyoming's biggest electric utility (Berkshire-owned PacifiCorp.) outlined a plan for ending coal usage while building out huge solar, wind, and storage capacity in the next two decades. This came after a 2018 report found that more than half its coal units were uneconomical.
Renewables have other advantages, too, from the market's point-of-view. Extracting oil and gas gets tougher and more expensive as they get used up, and has always been a risky prospecting business. But solar and wind are predictable. You don't have to guess where the sun shines and where the wind blows. You don't have to take huge risk simply to "get" the energy--you just have to fund the buildout of panels and turbines. And this translates into the competitive advantage of a much lower cost of capital than fossil fuels--roughly 2.6% to 5% in the U.S. and Europe.
And that reinvested capital keeps helping the cost of solar continue its rapid decline. The cost of solar electricity was 20-50% cheaper in the IEA's 2020 World Energy Outlook than it estimated just the previous year, with "similar" reductions in the cost of wind. Some solar projects are now as cheap as $20 per megawatt hour, prompting the IEA to call solar "now the cheapest source of electricity in history."
That could even mean that even the thorniest users of coal--like India--could use far less than thought in the years ahead as solar gets cheaper and cheaper. The IEA is making huge adjustments already in how much it thinks India will need, from doubling by 2040--which would have made it one of the biggest drivers of coal usage globally--to barely growing at all.
And rather fortunately, the plunge in renewables pricing means that huge, costly nuclear plants with big waste issues don't have to be a key part of the energy future, either. (Sweden has such a problem storing nuclear waste that it's threatening to cause blackouts.) This has also all happened without the U.S. embarking on a major carbon "price" project--the solar and wind is becoming so affordable that it's jumped ahead of such efforts.
That doesn't mean we won't get to a carbon price at some point, even if it's a bit after the fact. The price of carbon is actually at record highs in Europe, topping 59 euros per tonne last week for the first time. The first U.S. carbon ETF--the KraneShares "KRBN," which launched last year and tracks the IHS Markit Global Carbon Index (covering Europe, California, and the Northeast cap & trade program)--is up 56% year-to-date.
Why? It's increasingly clear the total amount of carbon that policymakers, especially in Europe, will allow emitted from now on in order to reach climate policy goals will be capped--say, in the 600 gigaton range. So a fixed supply of carbon facing, for now, increased demand by producers is resulting in a higher cost per unit. And higher costs will continue to make fossil fuels less competitive with renewables over time.
By conservative estimates, already two years out-of-date, the price of oil would have to collapse to $10 to $20 a barrel just to stay cost competitive with renewables, according to Mark Lewis at BNP Paribas. Little wonder Engine Number One triumphed at Exxon. And Texas itself has already become the leading U.S. provider of wind energy! It feels like there is a much bigger reckoning for the oil and gas industry still to come.
See you at 1 p.m!
Kelly KEY STORIES
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