Green energy transition - some more thoughts

A three-part series (this, this, and this) in NYT draws attention to the rapidly emerging green energy economy. This and this are two very good reads on the sources of carbon emissions and on the bottlenecks in the US electricity transmission grid respectively. 

In just 15 years or so, renewable technologies have emerged and replaced conventional energy as the main energy generation source in the economy. 

Since 2009, the cost of solar power has plunged by 83 percent, while the cost of producing wind power has fallen by more than half. The price of lithium-ion battery cells fell 97 percent over the past three decades. Today, solar and wind power are the least expensive new sources of electricity in many markets, generating 12 percent of global electricity and rising. This year, for the first time, global investors are expected to pour more money into solar power — some $380 billion — than into drilling for oil.

More than $1.7 trillion worldwide is expected to be invested in technologies such as wind, solar power, electric vehicles and batteries globally this year, according to the I.E.A., compared with just over $1 trillion in fossil fuels... Wind and solar power are breaking records, and renewables are now expected to overtake coal by 2025 as the world’s largest source of electricity... Those investments are driving explosive growth. China, which already leads the world in the sheer amount of electricity produced by wind and solar power, is expected to double its capacity by 2025, five years ahead of schedule. In Britain, roughly one-third of electricity is generated by wind, solar and hydropower. And in the United States, 23 percent of electricity is expected to come from renewable sources this year, up 10 percentage points from a decade ago... The U.S. solar industry installed a record 6.1 gigawatts of capacity in the first quarter of 2023, a 47 percent increase over the same period last year.

The Biden administration has ramped up support for clean technologies with extraordinary measures ranging from direct subsidies to both manufacturers and consumers, and with favourable regulations.

In the United States, President Biden signed a trio of laws during his first two years in office that allocated unprecedented funds for clean energy: A $1 trillion bipartisan infrastructure law provided money to enhance the power grid, buy electric buses for schools and build a national network of electric vehicle chargers. The bipartisan CHIPS and Science Act set aside billions of dollars for semiconductors vital to car manufacturing. And the Inflation Reduction Act, which marks its first anniversary on Aug. 16, is by far the most ambitious attempt to fight climate change in American history. 

That landmark law provided tax breaks related to electric vehicles, heat pumps and energy efficiency upgrades, solar panel and wind turbine manufacturing and clean hydrogen production. The government is also investing in efforts to capture carbon emissions and store them before they can reach the atmosphere, as well as technology that can remove them directly from the air. Originally estimated to cost roughly $391 billion between 2022 and 2031, the tax breaks are proving so popular with manufacturers and consumers that estimates now put the cost as high as $1.2 trillion over the next decade. Combined, the three laws have prompted companies to announce at least $230 billion in manufacturing investments so far. In Georgia, a Korean solar manufacturer, Qcells, is building a $2.5 billion plant. In Nevada, Tesla is building a new $3.6 billion electric truck factory. And in Oklahoma, the Enel and Canoo facilities are primed to benefit from the Inflation Reduction Act, as is a new $4.4 billion battery factory being considered by Panasonic, the Japanese conglomerate...

Mr. Biden has proposed tough new federal pollution limits on tailpipes and smokestacks, but several states are acting on their own. California, with market muscle that influences the entire auto industry, plans to halt sales of new gas-powered cars by 2035 and new diesel-powered trucks by 2036 — and a handful of states are following suit. In May, New York became the first state to ban gas hookups in most new buildings, requiring all-electric heating and cooking starting in 2026. Several cities, including New York and San Francisco, have similar prohibitions... Heavy investment by the United States has spurred a spirited reaction from other wealthy nations. Countries that initially complained that the United States was unfairly subsidizing clean energy manufacturers have since engaged in a sort of friendly subsidy race...

Federal tax credits of up to $7,500 have made the least expensive electric vehicles competitive with gas-powered cars. And about two dozen states offer additional tax credits, rebates or reduced fees, further pushing down their cost. Government action is also helping heavier vehicles go electric. Sales of electric school buses are soaring, largely because of $5 billion in federal grants that can cover 100 percent of the cost for low-income communities. The Postal Service plans to spend nearly $10 billion to purchase 66,000 electric mail trucks — roughly 30 percent of its fleet — over the next five years. 

The market dynamics too are working to solve the emerging constraints,

Concerns among consumers about the availability of charging stations as well as the cost of some models have helped to cool sales somewhat, leading some automakers to slash prices... Companies that provide charging stations are springing up to meet the demand. Francis Energy has more than 400 chargers across Oklahoma and is expanding nationwide. EVgo, which has one of the largest fast-charging networks in the United States, plans to more than double the 3,000 charging stalls it operates... In an unusual move, seven carmakers — BMW Group, General Motors, Honda, Hyundai, Kia, Mercedes-Benz Group and Stellantis — are spending $1 billion in a joint venture to build 30,000 charging ports on major highways and other locations in the United States and Canada. The shift is happening so quickly that some of America’s most iconic automakers are preparing for a world beyond gasoline-powered cars and trucks. General Motors, which has the largest market share of any carmaker in the United States, has committed to selling only zero-emissions vehicles by 2035... Ford Motor, G.M. and dozens of other companies are investing hundreds of billions of dollars to refit factories and build new ones to produce electric vehicles.

Accordingly, there has been a boom in green energy investments across the US

But the pace and scale of the transition, coupled with the large space and right of way requirements for renewables generation and transmission, is raising local opposition,

If lawmakers want to ramp up renewables as fast and cheaply as possible, they’ll need to bulldoze or build over some places that people treasure. From the desert suburbs outside Los Angeles to the rolling hills along the Ohio River to the Jersey Shore, residents are crying out against solar farms, wind turbines and new power lines. They are suing, passing laws and taking other steps to stop or slow projects, some of which would power the nation’s largest towns and cities with renewables. 

“Decisions that are not meant to be personal — they’re being experienced on a very personal level,” said Alison Bates, an environmental studies professor at Colby College in Waterville, Maine, who is studying ways to communicate with residents about offshore wind proposals. Many opponents of renewable energy, she added, “are worried about the impacts to their very way of life.” While Americans broadly support renewable energy, polls show, they are less enthusiastic about having it in their backyard. One survey from 2021 found that only 24 percent of Americans were willing to live within a mile of a solar farm; the number dropped to 17 percent for wind farms.

A big challenge with harnessing renewable energy is that the energy sources need large spaces and are therefore most often located distant from consumption centres, which necessitate laying long transmission lines. The right of way acquisition often takes inordinately long times. Then there are compliances and permissions related to environmental and other regulations, which take up significant construction time for renewable projects.

Across the country, clean energy projects of all types are tied up in lengthy permitting processes. For offshore wind, it can take up to 10 years to secure approval before construction can begin... Some environmentalists say that these stringent reviews are crucial for protecting fragile ecosystems or public health... Yet others concerned about climate change say the balance has tipped too far toward paralysis. Permitting has proved especially difficult for the nation’s antiquated and fragmented electric grid. The United States has some of the best renewable energy resources in the world, including gusty winds in the Great Plains and scorching sun in the Southwest. But to tap those resources, which are often far from population centers, developers will need to build thousands of miles of new high-voltage transmission lines. Yet building long-distance power lines can be a brutal slog. Reviews and permitting alone can take a decade or longer, and any state or county in the path of the lines can throw up roadblocks. Since 2000, the United States has barely built any major transmission lines that connect different regions of the country... Projects that manage to secure permits still need materials and workers, both of which are scarce... Supply chains are being further stretched by an effort to reduce America’s dependence on China.

Finally, there's the issue of behaviour change and adoption of these new technologies by consumers, which most often than not is about the costs.

Most people won't buy green technologies unless it'll clearly save them money and wows them with stunning designs or jaw-dropping performance. Many, conservatives in particular, chafe at the prospect of the government forcing them to buy electric cars or ditch their natural gas appliances, polls show. That’s perhaps why those pitching the technology often avoid mentioning climate change. They emulate evangelists who don’t lead with Jesus when trying to win over nonbelievers. A clean energy future will require painstaking and individually tailored persuasion campaigns. About half of Americans say they are not interested in buying electric cars, and a little more than half say they have not seriously considered solar panels, heat pumps or electric water heaters, a recent Pew Research Center survey found... 

“Nobody’s ever going to make a decision unless it benefits them in a money sense”... Cost was crucial, according to Mr. Leach. “I said, ‘I just want to know at the end of the month, am I going to be paying less even with my investment in solar?’ And that has been the case”... “I’ve had several friends of mine that were, you know, not necessarily trying to save the planet,” he said. “They just wanted to save money.”

Some observations.

1. One can think of three phases in the evolution of the renewable energy transition. The first phase was in continental Europe, especially Germany, Nordics, and Spain, which demonstrated the scale utilisation of renewable energy. These countries pioneered the technologies, commercialisation, and government support strategies. 

In the second phase, the Chinese leveraged the economies of scale (from its own massive market and the global market) and massive market-wide subsidies to commoditise and sharply drive down the price of renewables generation. In many respects, Chinese subsidies have been the biggest stimulus for renewables generation. 

The third phase is the US government activism described in the three articles. This phase may well carry the tailwinds required to boost green technologies across the world. 

The central role of industrial policy in all three phases has to be noted. The American announcement looks massive if only because unlike the others they have quantified and announced the life-cycle costs of the subsidy. 

2. In the context of green energy technologies, I think we'll need to make the distinction between renewable generation and green transportation. The former has undergone the transition required to reach price convergence (parity) with conventional sources, and has gone beyond that in many countries. However, green transportation remains far behind price parity with conventional internal combustion engines. 

3. Green transportation technologies need to solve their first-mover costs problems. Tesla has been a big disruptor, shortening the market development cycle, and Chinese makers like BYD have been quick to jump on the bandwagon and capitalise. 

But these companies are largely involved in serving the upper and middle market segments. In developing countries like India, the lower segment forms the largest volume market. These consumers being extremely price sensitive are unlikely to be swayed by environmentalism and other societal considerations. The same could be said about the middle segment too. Price convergence is therefore critical before green vehicles can make any significant dent in the private four-vehicle segment. And this, I feel, is likely to take several more years. 

4. In general, price convergence with conventional energy and transport sources can take place through two pathways - technology and regulation. The former leads to a reduction in the cost of green sources, and the latter results in an increase in the cost of conventional sources. While the developed countries have relied on the latter just as much as the former to achieve parity, developing countries may have to rely on the former much more than the latter. Their lower baseline incomes and very price-sensitive customers are unlikely to be able to absorb any significant regulatory costs. 

In this context, it's worth bearing in mind that the success of green transition in developed countries has been critically, or almost completely, dependent on the cost curve of these technologies. The pace and scale of transition have been dependent on the government and market's ability to drive down prices to make them comparable to or cheaper than conventional technologies. 

This dependence will be even more so in extremely price-sensitive markets of developing countries. But unlike their developed economy peers, developing countries face daunting challenges. Their governments do not have anything close to the deep pockets required to subsidise the energy transition. And their private sector does not have the capabilities and financial strength to absorb these technologies at the same pace and scale. And the vast majority of their customers cannot afford any additional costs of the energy transition. In the circumstances, the pace and scale of energy transition in developing countries, especially with green transportation, will be much slower and smaller.

5. Two-wheelers are likely to emerge as the pathway for green technologies into the automobile market in developing countries. But here too, some more distance need to the travelled before convergence and the subsidy regime has been tarnished by controversies. 

Incidentally, this market presents a good opportunity for corporate and startup Indian companies to put their hands up and become global leaders. With developed country entrepreneurs and investors interested in chasing cars and other vehicles, Indian entrepreneurs have the market laid out for them. Will they be able to seize the opportunity?

6. I'm inclined to believe that Africa's renewable electricity transition will take more time and will require significant public funding. There's the fundamental problem of the commercial viability of private electricity distribution. High transmission, distribution, and collection losses, coupled with low tariffs mean a high differential between the cost of supply and revenue realisation. This is a bigger affordability, state capability, and political economy problem that we cannot wish away. In the circumstances, private investments, critical to drive the adoption and scaling of renewable energy sources, are likely to stay away. 

The only way is for governments to commit to power purchase agreements and subsidise the differentials while also trying to reduce the losses. Till then the current trends of piecemeal decentralised renewable energy options will meander.