In search of cheap, clean energy

In search of cheap, clean energy

Of all the barriers to the energy transition the greatest is cost. High costs help explain why, despite a broad international consensus on the need to arrest carbon emissions, oil, coal and gas still account for about 80% of global energy consumption. Fossil fuels have dominated because they were cheap.

• Renewables, originally in the form of hydropower, have been around for many decades but, until about 15 years ago, their share of global energy use remained relatively flat. Building a new coal or gas-fired power plant provided cheaper power than new wind or solar capacity. Now, thanks to advances in technology and manufacturing, renewables are far cheaper. The price of electricity generated by new solar capacity has declined by over 90% in the last decade and the price of electricity generated by wind has fallen by over 70%.

• The decline in the cost of solar power is even more remarkable over a longer time period. The first practical use of solar power was to power US satellites in the late 1950s. The costs per watt were staggering, roughly five million times today’s levels. Through the 1960s solar panels were restricted to specialist, high-value settings, principally satellites. But as know-how and scale developed, prices started to fall, leading to the wider deployment of solar panels in areas without access to grid electricity. 

• Solar and, indeed, wind technology is subject to Wright’s law, coined in 1936 by aeronautical engineer Theodore Paul Wright. It describes how some products are subject to a learning curve, meaning that for each percent increase in cumulative production, there is a percentage improvement in efficiency as manufacturers learn by doing. In the case of solar and wind, government subsidies, especially in China, have played a major role in kickstarting the process. The result has been a virtuous cycle of lower prices driving demand and production which, in turn, drives down prices. The Our World in Data website estimates that every doubling of installed solar capacity leads to a roughly 20% decline in the price of solar modules.

• By contrast fossil capacity does not follow Wright’s Law. Costs do not decline over time. Fossil fuels require capital investment and a fuel that must be found, extracted, processed and transported. The price of coal burnt at power plants, for instance, accounts for roughly 40% of total costs. Oil, gas and coal have an irreducible cost. 

• Renewables have the dual advantage of enjoying declining technology costs and a ‘zero-fuel cost’ as fuel is in the form of sun and wind. Solar has particular advantages. Solar panels are a relatively standard, low-maintenance product with no moving parts, quite unlike a jet engine or a gas turbine. This simplicity has created intense competition from manufacturers that has helped drive down prices. And, as The Economist observed in a recent article, the building block of the technology – solar panels – is the same whether being put on the roof of a house in London or used to create the vast solar farms that are being built across the world.

• The lower cost of renewables has led to a vast increase in wind and solar capacity. According to the Our World in Data website, since 2008 renewables have almost doubled, from 8% to 15% of world energy use. The Economist estimates that total solar capacity doubles roughly every three years and rises tenfold every decade. By the mid-2030s solar will be the biggest source of electrical power, according to The Economist, and the biggest source of power by the mid-2040s.

• Lower costs are a necessary, but not sufficient condition to achieve a complete transition from fossil fuels. The central challenges with solar and wind are intermittent supply, the need for storage and getting power to consumers. The sunniest parts of the world tend to be distant from the heaviest users of energy. (A UK-based company, Xlinks, is planning to connect the UK grid to solar and wind energy generated on a 1,500 square kilometre site in Morocco through 3,800km of high-voltage direct current subsea cables.) Solar requires large areas of land that, at least in densely populated countries like England, can conflict with the needs of agriculture, recreation and house building. Onshore wind tends to be unpopular with nearby residents which helps explain why the previous UK government operated a (now repealed) de facto ban on new onshore capacity.

• Many types of energy use, such as aviation, heating, shipping and road transport will require huge investment to switch to electricity. Electricity from new solar and wind capacity is becoming ever cheaper but storing, transporting and using electricity will involve vast levels of capital spending. As the take up of electric vehicles or the state of electricity grids attest, improvements in wider energy infrastructure lag far behind improvements in solar technology. Energy transitions are far more than a change from one energy source to another. Wholesale energy transitions shape economies and societies.

• Western countries also fret about China’s dominating position in the global market for solar panels. With heavily subsidised manufacturers, a vast domestic market and years of investment, China now accounts for 80% of global solar capacity. Consumers around the world have reaped the benefits in the form of ever cheaper solar power but critics worry about the loss of western capacity and know-how in a key energy technology.

• Yet none of this should obscure the remarkable fall in the cost of solar and wind power. That process has much further to run. Renewables, once an expensive alternative to fossil fuels, will increasingly become the low-cost option.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.2% at 8,156 following a significant IT outage on Friday morning.

Economics

• An IT outage hit organisations around the world, disrupting flights, live broadcasts, healthcare retail and many other sectors. US software group CrowdStrike said that its software update had impacted Windows hosts
• Shipping data business Xeneta reported that the cost of moving a container between Asia and northern Europe has more than doubled since April due to increased Houthi attacks on ships
• The UK’s Climate Change Committee warned that the UK was not on track to meet its 2030 climate target and called for a reduction in electricity levies and an acceleration of wind, solar and heat pump installations
• UK average earnings growth slowed to 5.7% in the three months to May while the unemployment rate remained unchanged at 4.4%
• UK consumer prices rose by 2.0% in the 12 months to June, unchanged from the previous month and in line with the Bank of England’s target. While goods prices fell by 1.4% the price of services rose by 5.7%, which together with still-high earnings growth could be seen by the Bank as evidence of continued inflationary pressure
• UK public sector borrowing of £14.5bn in June was higher than expected but also the lowest seen in that month since 2019 as tax revenues have risen and the energy support scheme has ended
• UK retail sales fell by a greater-than-expected 1.2% from May to June amid unseasonably poor weather
• UK consumer confidence edged up to reach its highest level since September 2021
• China posted lower-than-expected GDP growth of 4.7% year on year in the second quarter amid continued weakness in the property sector
• The Chinese Communist Party’s deputy director for economic affairs said that “proactive fiscal policy must be used to better effect” as “China’s economic recovery is not strong enough”
• US stocks have seen a rotation away from mega-cap tech stocks and towards small-cap stocks following strong earnings data and falling inflation
• US chip stocks also saw a difficult week after US president Donald Trump said that Taiwan should pay for its own defence and reports that president Biden was considering further restrictions on sales of semiconductors to China
• The price of gold reached a record high of $2,483.60 per ounce on Wednesday as investors increasingly expect the Fed to begin cutting rates in September

Business

• Bidding began on Friday for the UK newspaper The Daily Telegraph and Spectator magazine after the UK government blocked the sale to an Abu Dhabi-backed group
• UK telecoms regulator Ofcom will restrict inflation-linked price rises mid-contract for mobile and broadband services from January next year
• A record 418,000 flights are scheduled between the US and Europe this summer, 7% above last year’s record as the strong dollar boosts demand from US holidaymakers
• Netflix announced that it added more than 8m subscribers in the second quarter, in part due to a crackdown on password sharing

Global and political developments

• President Biden dropped out of the race for the White House and endorsed vice president Kamala Harris for the Democratic nomination
• US Republican presidential candidate Donald Trump formally accepted his party’s nomination, vowing to reduce taxes, raise tariffs and cut immigration
• Mr Trump announced Ohio senator JD Vance as his running mate. Mr Vance has been highly critical of American aid to Ukraine
• Houthi rebels in Yemen claimed responsibility for a drone attack on Tel Aviv that killed one person and injured several others
• French president Emmanuel Macron’s preferred candidate was re-elected as president of the National Assembly, suggesting possible support for a broad alliance from the centre of politics to form a new government
• At least 19 people have been killed during protests in Bangladesh against a system that reserves public sector jobs for descendants of veterans of the country’s 1971 war of independence from Pakistan
• A Russian court jailed US journalist Evan Gershkovich for 16 years following a conviction for espionage. Washington described the trial as a “sham”
• The King set out the legislative agenda for his new Labour government that included the nationalisation of the railways, new protections for workers, planning reform and new powers for the Office for Budget Responsibility
• UK prime minister Keir Starmer called for deeper defence and security cooperation across Europe at a meeting of the European Political Community
• Mr Starmer also announced that 44 European countries had agreed to crack down on the so-called ‘shadow fleet’ of tankers that were being used to flout sanctions on exports of Russian oil
• UK chancellor Rachel Reeves hinted that she was inclined to offer above inflation pay rises for teachers and nurses
• The UK COVID-19 Inquiry published its first report that criticised the government for preparing for the “wrong pandemic”
• Welsh first minister Vaughan Gething announced that he would stand down after four of his ministers resigned
• The UN’s top court issued a non-binding opinion that Israel’s West Bank settlements policy violates international law
• Ursula von der Leyen was re-elected as president of the European Commission in a secret ballot of MEPs

And finally… last week the King and Queen of England enjoyed a visit to Jersey and Guernsey. However, for the first time in 800 years they were not presented with dead ducks, a break with a tradition of gifting the expired waterfowl to new monarchs that dates back to Norman times – winging the changes