In the early 20th century, when cars started to compete with horse-drawn carriages in Europe, they still had innumerable technical teething issues and no distribution channels. Germany’s last emperor William II famously said (possibly while sitting on a horse): “I believe in horses, automobiles are a passing phenomenon.” Well, you know which side of history he was on. Cars, of course, did not only complement horse-drawn carriages, they replaced them. I would argue that we will see something similar in our energy future, where renewables will not only complement but replace fossil fuels.
I was just reading two excellent macro-level takes on the global energy future and the economics of renewables. One was Scott Nyquist’s very interesting discussion in McKinsey Quarterly of why renewables have been so resilient in the face of low oil prices (which was supposed to be “like Kryptonite to Superman”, see here). The second was the new Energy Outlook by BNEF (including a fantastic new data visualization, see here). The BNEF outlook predicts very strong growth for renewables until 2040. They will make up 2/3rd of the $12 trillion investment into new power plants until then.
They argue, however, that despite this growth, fossil fuels will maintain a 44% share of the market in 2040. Our energy mix will evolve over time in a gradual manner. If you look at the predictions of e.g. the IEA or BP, the picture is the same. Aside from the fact that this gradual shift – even, if accompanied by rapid growth in renewable energy investment – will not get us to where we need to be from a climate perspective, I wonder, if this is the right way of projecting our future energy mix.
When comparing fossil fuels with renewables, we are comparing two very different things. Fossil fuels are (as the name says) a fuel. They are dug up and converted into electricity in power plants whose technology is very mature. The fuel cost makes up around 4/5th of the cost of power.
Renewables (I here refer mainly to wind and solar), on the other hand, are a technology. The energy source is free. We invest into the conversion technology which makes up almost all the power cost.
Over time, as the BNEF report shows very well, renewables will become cheaper and cheaper (the more you deploy a technology, the cheaper/better it gets), becoming the cheapest power generation source in most places. In addition, as the article by Scott Nyquist shows, the cost of storage is coming down very quickly. This will create a world, where renewables can supply reliable power at the most competitive rates. What does that mean?
It will, of course, affect new investment choices. More money will go into renewables and less into fossil fuel power plants (as BNEF writes). This will change our energy mix – slowly. But will that be all?
I would argue: no. In addition to this evolutionary change, there will be a revolutionary change. I.e. At some point, we will see a sudden drop in the use of fossil fuels and a sudden uptake in the use of renewables. By 2040, I can imagine renewables are simply replacing existing fossil fuel plants, as it will be cheaper to build a new renewable power plant (technology) than to operate an existing fossil fuel plant (fuel).
In fact, this condition will likely be anticipated by investors, who will stop investing into fossil fuel plants even before the actual tipping is reached. Why would they invest into a new coal fired plant and why would governments/distribution companies sign long term PPAs, if the power it produces will be competed out of the market a few years later?
The basic economics of energy will ensure a rapid energy transition. This will be disruptive and there are big questions about how it will happen. Will gas consumption spike? Will distributed generation take over? Etc. However, it will not be the smooth, evolutionary path outlined in most future energy mix predictions. It will be much messier (and, of course, much harder to predict in detail)
Update 27th Aug 2015: In a recent report, Citi Bank made a similar point, arguing that the share of fossil fuels in the electricity (not energy) mix could fall from 64% to 22% by 2040. Renewables, especially solar, could grow much faster than IEA projects. See the GTM analysis here.