There’s no demise in renewables: why my colleague Nick Hubble has got it wrong

One day after my colleague Nick Hubble spluttered coffee over his morning cornflakes, my bowl of coco pops received a caffeinated side of spittle, too.

And it was Nick’s piece that caused the spluttering.

It turns out that clean energy is something people only want when they can afford it. The latter being the prerequisite. The challenge being that many other things also become unaffordable when you have to pay high energy prices.

Nick was referring to a sobering survey by Bloomberg New Energy Finance that revealed new clean energy investment in developing nations slipped sharply last year amid a slowdown in China, while coal use reached a record high.

This was proof, Nick said, that green energy tech was “struggling to keep up with the fad it created.”

Rolling out vast amounts of green tech infrastructure before it’s effective is a bad idea. And developing nations know it.

According to Nick, it had been an “epic mistake” to roll out renewable energy before it was cost efficient. As he correctly pointed out, Beijing yanked subsidies for solar panel projects in the middle of last year, and is shrinking those for wind, in large part causing last year’s abrupt shift.

Yes, hold the front page, dear reader. Renewables in subsidy shocker!

Of course, renewable energy, still a nascent industry, has been helped along the way by subsidies.

And, of course, it’s disappointing to see the growth rate in renewables in China fall.

But it’s by no means a surprise.

The underlying realities – that economic growth is more important than international climate commitments – should certainly not come as a shock.

It’s part and parcel for all maturing economies, after all.

China’s economy, car market and electricity use all indicate a secular slowdown after decades of above-trend growth.

China is still on track to build around 25 GW of new solar this year, most of which will be unsubsidised. To put that in context, Germany, Europe’s leading solar nation, has installed around 45 GW of solar capacity ever.

Subsidies for dirty energy dwarf those for renewables

Now Nick’s a friend, but if he thinks renewables are the only sources of energy that receive government payouts, he’s sorely mistaken.

Fossil fuel energy is awash with subsidies, whether its tax breaks for oil and gas operators or lower rates of VAT on domestic gas and electricity.

In fact, governments across the world support coal, oil, and natural gas far more than clean energy.

The International Monetary Fund, which periodically assesses global subsidies for fossil fuels as part of its work on climate, found in a recent working paper that the fossil fuel industry got a whopping $5.2 trillion in subsidies in 2017. This amounts to 6.4% of the global gross domestic product.

In fact, a lot of subsidies for dirty energy don’t even come from the taxpayer, they come from newly created money.

Just look at the US, where shale production, which has always been profoundly lossmaking, is now running out of investors generous enough to fund its losses.

Be clear: the cost of the majority of conventional energy supply is moving above commercial viability thresholds.

And although the fossil fuel industry has a massive incumbency advantage over renewables, that advantage is getting smaller every year.

Renewables are penetrating the global energy system faster than any fuel in history, rising from 1% to ~4% share of world energy twice as fast as oil did.

Renewables on brink of major tipping point

One year’s worth of data notwithstanding, it’s clear a turning point is arriving in the decarbonisation of global electricity where capital markets and economics trump government policy.

It’s a matter of when and how, not if, wind and solar disrupt electricity systems everywhere.

After all, cheap renewables and batteries are remaking the world’s power systems. The price of solar PV modules has dropped 83% since 2010, while market prices of battery packs, which let wind and solar generate when the wind isn’t blowing and the sun isn’t shining, have fallen 80% over the last eight years – both exponential declines.

This rapid shift in the economics of energy has brought renewables to the brink of a major tipping point.

Not long ago, few people would have imagined that by 2018 we would be talking about a subsidy-free future for renewables, yet that is exactly where we are now: renewable energy is on the verge of paying its own way.

Solar is now the cheapest form of new electricity on the planet. No subsidies needed.

Earlier this summer, Brazil’s renewables auction saw 211 MW of solar PV capacity signed at just $0.0165/kWh – a new world record.

This was not just the cheapest price for solar ever assigned, that was the cheapest unsubsidised contract for electricity of any sort on planet Earth… with any technology ever in history.

Fighting solar is now a losing economic battle.

In many places it is already cheaper to build and run new solar (and wind)/batteries – without subsidies – than to run on existing coal. In the next few years it will be everywhere.

Utilities are increasingly facing up to the fact that unsubsidised wind, solar plus storage is so cheap it undercuts existing coal capacity.

Coal is dead

No wonder, then, that fossil-fuel investments are running at terminal-decline levels. In fact, the volume of coal generator approvals has recently fallen below plant retirements, possibly for the first time since the 19th century.

Final investment decisions, or FIDs, for coal plants have fallen by about three quarters over the past three years, from about 88 GW over the course of 2015 to around 22 GW in 2018, according to the International Energy Agency’s world investment report.

We’ve already hit a peak in global plant capacity.

Indeed, global coal power is set to fall by a record 300 TWh, or 3%, this year. In fact, global coal consumption peaked in 2013, with much of the industry going bankrupt as demand flattened.

Five years later and the withdrawal of global financing for coal continues to pound away at the problem. Even in India – one of the last great hopes for coal growth – is set to see coal consumption fall by 24 TWh this year.

Not only is the end of coal nigh, we are now entering a golden age of renewable energy.

For investors, these are exciting times.

That’s because renewables aren’t just good for the planet. They’re the smart choice for investors, and the economy.

Rather than fretting over when renewables become the predominant part of the global energy system – the system rate of change, if you will – investors should focus on the marginal rate of change, which is how much of the growth in energy demand every year that renewables are taking.

It’s this marginal rate of change that really determines the value of assets and investments.

That’s why the iShares Clean Energy exchange-traded fund (ETF) has risen by 30% so far this year, streaking far ahead of the oil-dominated Vanguard Energy ETF, which has fallen by 0.7%.

It’s why NextEra Energy, which has developed enough wind and solar farms across the US and Canada to power the entire nation of Greece, is the world’s only $100 billion utility, now twice as valuable as the oil major ConocoPhillips.

Its shares have doubled in four years, outperforming virtually every other stock in the utility space.

Yes there will be roadbumps

Of course, there will be roadbumps along the way, especially in the developing world, but they’ll increasingly be technological and political blockages, not economic ones.

As an example, we need to greatly increase the storage capacity of renewables to achieve their full potential.

What’s more, there are vested political interests in the system in maintaining the status quo.

It’s clear, too, that the developed world should live up to its commitments to actually finance clean energy no matter where it is.

Wealthier countries could do a lot more to help poorer ones to decarbonise, whether that’s by providing low-interest capital or subsidised technology, or by developing cheaper clean-energy solutions.

And, yes, of course, government policy in many places is still essential. We need targeted incentives to ramp up storage capacity enormously so that renewables can come through at ever greater scale, which will cause a technological response, just like how we kick-started the move to solar and wind 10-15 years ago.

But there will certainly be no global coal renaissance as countries shun renewables.

If Nick wants to invest in a coal stock, he better be quick. They’re increasingly thin on the ground these days.

The punchline is this: not only is energy transition happening, it’s actually happening faster than we think.

Despite what you might read elsewhere, it’s clear that solar and wind have already won the race for cheap, bulk electricity – the race just hasn’t finished playing out yet.

Until next time,

James Allen
Editor, Southbank Investment Research

Category: Energy

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