Renewable electricity from solar and wind costs less than electricity from gas and coal, and can be implemented everywhere at huge scale, giving rise to a trillion-dollar energy windfall

A sampling of stories from just the past week:

  • Renewable electricity from solar and wind costs less than electricity from gas and coal, and can be implemented everywhere at huge scale, giving rise to a trillion-dollar energy windfall, according to Inevitable Policy Response, a project of the U.N. Principles for Responsible Investing that aims “to prepare investors for the associated portfolio risks.”
  • Transforming the way that food is produced, processed, distributed, consumed and disposed of in order to deliver a sustainable food system could yield up to $4.5 trillion a year by 2030 to companies, according to a report from the Food and Land use Coalition, a group established at the United Nations in 2017.
  • Investing in low-carbon cities is projected to be worth “at least $23.9 trillion” by 2050, according to research by the Coalition for Urban Transitions, an initiative of the New Climate Economy, jointly hosted by WRI’s Ross Center for Sustainable Cities and the C40 Cities Climate Leadership Group.
  • Investing $1.8 trillion into early warning systems, climate-resilient infrastructure, improved agriculture, mangrove protection and more resilient water resources between 2020 and 2030 could generate $7.1 trillion in total net benefits, according to a report by the Global Commission on Adaptation, headed by Microsoft founder and philanthropist Bill Gates and former U.N. Secretary-General Ban Ki-moon.

And these don’t include trillions more of banks’ and investors’ money:

  • A group of 515 global institutional investors with more than $35 trillion in assets under management last week urged world governments (PDF) to step up efforts to tackle climate change. The Global Investor Statement to Governments on Climate Change, from a group called the Investor Agenda, said that while investors are taking action on climate change, there is an “ambition gap” with current government commitments to the Paris Agreement.
  • A group of 230 institutional investors led by Ceres and PRI, and representing $16.2 trillion in assets under management, called on companies (PDF) to publicly disclose and implement a commodity-specific “no deforestation” policy with quantifiable, time-bound commitments covering the entire supply chain and sourcing geographies, including establishing a transparent monitoring and verification system for supplier compliance with the company’s “no deforestation” policy.
  • More than 1,100 institutions with more than $11 trillion in assets under management have committed (PDF) to divest from fossil fuels.
  • And leading banks and the United Nations launched the Principles for Responsible Banking, with 130 banks — collectively holding $47 trillion in assets, or one-third of the global banking sector — committing to strategically align their business with the goals of the Paris Agreement and the Sustainable Development Goals, “and massively scale up their contribution to the achievement of both.”

And then there’s the U.S. presidential campaign, where the leading Democratic candidates seem to have entered an arms race of climate plans, each invoking the T-word. Bernie Sanders, for example, proposed a staggering $16.3 trillion federal investment over 15 years in renewable energy and public infrastructure. By contrast, Pete Buttigieg’s proposal to invest a measly $1 trillion in climate solutions seems a weak cup of tea.

What, in the name of inflated expectations, is going on here?

Beyond climate

Clearly, the climate crisis has reached a new level of ambition, at least in financial terms, even if it still may fall short of what world leaders in New York are calling for this week. Nonetheless, the fact that investors, governments and corporations are backing up their concern with real money is a sign of how far the climate movement has come.

It’s still not enough. After all, there are all the other, non-climate aspects of the Sustainable Development Goals that need to be addressed.

It’s still not enough. After all, there are all the other, non-climate aspects of the Sustainable Development Goals that need to be addressed.

Case in point: Countries must increase spending on primary healthcare by at least 1 percent of their gross domestic product “if the world is to close glaring coverage gaps and meet health targets agreed in 2015,” according to a report released over the weekend by the World Health Organization. That falls slightly short of the T-word, since 1 percent of global GDP — projected to be a bit over $88 trillion in 2019 — amounts to a piddling $880 billion. But that’s still a big number, and keep in mind that the key words here are “increase spending … by at least,” so the sum total still could include 12 zeroes.

It’s all just numbers, an abstraction at best. The real work has to do with how this money is deployed, and how quickly. As everyone knows, where there’s big money, shenanigans often follow. And the pace of deployment can result in solutions being too little, too late.

Still, it’s an encouraging sign — real money, as it’s been said — and nicely in line with the unofficial meme of Climate Week: “higher ambition.” It’s long been evident that all of the corporate, governmental and nongovernmental commitments and actions to date to stem the climate crisis have been insufficient, by long shot.

And as forests burn, oceans warm, cities parch and crops wilt — exactly as was predicted some decades ago, but also faster than some expected — this influx of capital commitments is a welcome sign that higher ambition is on the near-term horizon.

In a word: Priceless.Topics: 

Analyst Notes

The Trillion Dollar Energy Windfall

Energy transition05 September 2019  Download the full Analyst Note

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Falling renewable costs and intermittency solutions drive a tipping point for the Inevitable Policy Response

The Inevitable Policy Response (IPR) is a landmark project which aims to prepare financial markets for a wave of policy moves as governments worldwide are forced to address climate change. More about this collaboration between PRI, Vivid Economics and Energy Transition Advisors can be found here.

This work focussing on renewable energy costs makes a compelling case for policy makers to enable and force the energy transition.

In this note we focus on the growth in the supply of electricity from solar and wind (renewables) in a system dominated by electricity from coal and gas. As renewable costs fall, it becomes economically rational to deploy renewable energy in more and more areas, a remarkable change from only a few years ago.

Cost tipping points

The below chart illustrates the cost per MWh and the four main tipping points for renewable energy:

  1. New renewables are cheaper than new fossils.
  2. New renewables are cheaper than the operating cost of existing fossil plants.
  3. New dispatchable renewables are cheaper than new fossils.
  4. New dispatchable renewables (with a battery) are cheaper than the operating cost of fossils.

Renewables are now an industry driven by economic gain, technological revolution and provide pathways to reach the goals of the Paris Agreement. The reward to successful policymakers will be greater wealth, cleaner air, reduced global warming, energy independence and electoral success.

KEY FINDINGS

Time to reap the harvest.  Renewable electricity from solar and wind costs less than electricity from gas and coal, and can be implemented everywhere at huge scale, giving rise to a trillion dollar energy windfall.  The challenge for policymakers is to reap this harvest.

Renewable costs are below those of fossil fuels.  Five years ago, fossil fuels were the cheapest baseload.  The collapse in renewable costs means that for two thirds of the world, renewable electricity is the cheapest source of new baseload.  By the early 2020s it will be every major country.

The business case keeps getting stronger.  As costs fall, so new cost tipping points will be crossed over the next decade.  The cost of new renewables will become cheaper than fossil operating costs during the 2020s, and the cost of dispatchable renewables (with a battery) will fall below the cost of new fossils.

The intermittency ceiling is high and rising.  New technologies and tools keep raising the intermittency ceiling, as countries like Germany and the UK move over 25% variable renewables and regions like South Australia and Northern Ireland aspire to 50% and more.  Meanwhile, 97% of the world’s population is below the intermittency ceiling, and can copy the leaders.

The imperative to act is still there.  Renewables provide a way to reach the goals of the Paris Agreement, cut deaths from air pollution, and enhance energy independence.  They produce more local jobs, increase social justice and are extremely popular.

The harvest is huge.  The world can now enjoy a renewable energy windfall – a Gigafall.  6 PWh of renewable energy can be produced before even today’s intermittency ceiling is reached.  Ascribe that a value of $10 per MWh and capitalise, and you have a trillion dollar windfall.  Add in the value of renewables in cutting the externality costs of fossil fuels, and you rapidly get to a much larger number.

The transition will be sequenced.  Countries with large domestic coal and gas extraction and electricity generation will face more powerful impediments to change.  However, countries with rising demand and pollution issues and those with significant fossil fuel imports will drive the transition.   A quarter of global coal and gas is imported, and 65% of people live in counties that have rising energy demand and import coal and gas.

Why will policymakers act.  The reward to successful policymakers will be greater wealth, cleaner air, reduced global warming, energy independence and electoral success.  This drives the Inevitable Policy Response.

What will policymakers do.  There are four key areas of action:  provide enabling regulatory regimes; tax the fossil fuel externality; force the pace of change, and retrain fossil fuel workers for the new world.

Carbon Tracker is an independent financial think tank that carries out in-depth analysis on the impact of the energy transition on capital markets and the potential investment in high-cost, carbon-intensive fossil fuels.

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