Diving Into Stories of Energy Transition with Chris Nelder
Editor’s note: In this installment we discuss the potential role of renewable energy in transition and macroeconomic models in the face of supply constraints.
Justin: I hear frequently on blogs and in other discussions that building renewables won’t work because of what we were just discussing about the drop off of oil production and the difficult economic consequences that such a drop would have, especially later this decade. Could [this fall off in oil availability] prevent us from building out renewable energy infrastructure?
Chris: I’ve made that argument myself. I’m very concerned about it. If we do in fact have global oil production beginning to decline around 2015, which has been my call for quite a few years now, and when you actually calculate the decline rates to look at how much oil would be lost on the global market, year after year… then you start to think about the effect on the global economy of losing 5%… and then 10%… and then 20% of global oil production. Then it doesn’t take a huge leap of imagination to think, ‘Wow, it is really going to be difficult to maintain a functioning economy.’ It is going to be hard to maintain global shipping. It is going to be hard to maintain an industry of, for example, big wind turbines where the supply chain for the parts in those turbines might go all around the world.
My view has been that we should build as much renewable capacity as possible for the next 20 years while the availability of oil is reasonably good, and the price is reasonably acceptable. I think once you get out past say… 2030, it is going to be quite difficult, and quite expensive, to build or deploy anything that requires a lot of shipping or requires parts coming from all around the world.
Now some people will take this question a step further and say, ‘What about later in the century when you get out to 2070 or 2080 when most of the oil is gone, most of the natural gas is gone, what about that? How do we build wind turbines and solar panels and get them installed?’ Well, I think that’s an interesting question, but the more I think about it, the more I conclude that we just don’t have enough information to answer that question right now. It is just formally unanswerable because there’s too many questions, too many uncertainties about how people will react. What will happen to the geopolitical environment? What will happen to population, what will happen to energy supply? There’s just way too many X factors and we don’t know.
I think it is conceivable, maybe somewhat remotely conceivable, that at some point, in the 22nd century perhaps, we could have an economy entirely powered by renewable energy where we’re actually able to do things like… mining, smelting, manufacturing, transportation and installation and more using only renewable electricity as the energy source and to drive all the machines. Or, maybe we’ll have some very small fraction of the stuff that we currently use liquid fuels for. Maybe this can be powered using some sort of biofuels, but this is just not a formally answerable question.
I’ve batted this question around a lot, especially with people who are literate on the energy return on investment (EROI) question. What’s the EROI of these renewable fuels? Can you run a civilization on them? I’ve looked at these studies on solar and on cellulosic ethanol or other types of biofuels, wind and so on, and I just don’t think they’re conclusive. I’ve got so many issues with these analyses, I don’t think it’s possible to really be terrible conclusive about what it all means. Though one thing I do know, is that we have to build as much renewable capacity as we possibly can in the next 20 years, while oil is reasonably available and reasonably priced.
The explanation of why this is occurring from Steven Kopits is that the repricing of oil in the first decade of the 21st century is really this missing factor in macroeconomic models – the reason why growth is moving so slowly at the moment.
You were just saying that projecting out several decades, the situation is going to get much worse. Do you think the kind of thinking that you were putting forward there will gain any kind of mainstream traction? That the reason why the economy is growing so slowly and a major reason behind the malfunctioning of our economic system is because of energy depletion?.
Chris: Yeah, I think it is sort of a fait accompli at some point. There’s a really small group of people who really understand energy and economics. Many people seem to understand energy, or understand economics, but not both.
Some of us started to look deeply into energy supply, particularly the fact that oil supply stopped growing in 2005, as a real factor in the global economic situation. As it became increasingly difficult to produce new supply, the rising price of oil acted as a break on the global economy. James Hamilton did some nice work on that and quite a number of other people that have looked into that question. I think this is very much the case.
Kopits’ presentation was fantastic. I think anyone could take an hour to look at his presentation and would understand everything they could possibly need to know about the global oil supply and demand and price situation. It was just a perfect encapsulation of everything you need to know.
One of the key things he really brings out in his presentation is that historically, every one has modeled future oil supply from a demand perspective. That’s what the IEA and EIA does. That’s what the whole alphabet soup of agencies do, they forecast demand and then they say ‘well, there will be supply, and it’ll be at an acceptable price’. That’s fine while you’re in a century of continually growing oil supply that’s relatively cheap, but that’s not the case anymore. We’ve exited that era in history and we’ve now gotten into a supply constrained world.
That’s what Kopits’ firm does, they look at a supply based model. It has actually given much better guidance for what price has actually done and for what’s actually happening in the global economy along with modeling what’s likely to actually happen in the future. I absolutely subscribe to that.
Ideally, we would have very sophisticated models that would actually be able to dynamically model what the future supply of fossil fuels is likely to be, what it’s price is, what the effect will be on demand, what the possible substitutions will be, how geopolitics will react to that and so on, but this is just a very complex question and as far as I know, nobody is even close to having a good model. No one in the world has a model that’s sophisticated enough to do all of that, to really provide a multi-variant model of the global economy with with a constrained oil supply.
Justin: Germany has an interesting energy transition underway right now. Is their strategy one that might work? Should the US think about adopting that strategy?
Chris: I think the Germany model [for energy transition] is fantastic. I’ve written quite a bit about it myself. They have managed to shut down most of their nuclear capacity and they’re on course to phase it out entirely while growing their renewable supply from almost nothing to 25% of their energy supply, in a little more than a decade.
So far it’s been a very popular thing; most Germans support it, most Germans want to see the energy transition continuing. Most of the solar capacity and wind capacity, I believe, in Germany is actually not owned by the utilities, it is actually owned by the public where they buy small shares in these little solar and wind projects so everyone’s a stakeholder and it’s been highly effective. Germany does not have a great solar resource but they have managed to do it at a reasonable price. They have more solar capacity per capita than any other country in the world.
Naturally they’ve been the target of incumbents who are trying to fight energy transition and their mouthpieces in the press. Der Spiegel is constantly talking down the energy transition, constantly distorting the debate with sort of mistaken narratives about why grid power is so expensive. Well guess what, most of it isn’t because of the FIT for the solar. You know how expensive grid power would’ve been without it? Their recent uptake in coal power, well, it’s not really because they are phasing out nuclear and it’s not really because of their adoption of renewable power.
If Germany brought its nuclear reactors back online today, it would not displace coal. It would displace gas, because gas if far more expensive then coal over there. While it is a complex topic, I’m definitely a fan and I think Germany is doing a wonderful job of sort of showing the rest of the world how you can produce a large percentage of your grid power from variable sources like wind and solar at a reasonable price without the grid falling down. In fact Germany now has the most reliable grid in Europe. If you go back to 1993, people were saying, ‘If Germany ever had more than 3% of its grid power from renewables the grid would fall very because it is intermittent and it is much too expensive, stilly and stupid.’ Well guess what, they are getting 25% of their power from such sources and the most reliable grid in Europe.
The other side of this story is that the incumbent utility industry in Germany is now in serious serious trouble. The three largest utilities: EON, RWE and ENBW are struggling with what the CEO of RWE called, “the worst structural crisis in the history of energy supply.” They have falling consumption and growing renewable power which has made it unprofitable to continue operating coal, gas and oil fired plants. EON and RWE are going to close or moth ball 15 GW of gas and coal fired plants in the coming years and there’s another 12GW of nuclear plants that are going to be retired by 2020.
Justin: And that’s just all sunk investment costs that then have to be written down?
Chris: That’s right, RWE is going to write down about 4 billion on those assets. The returns on invested capital of these three utilities are going to fall from about 7.7% in 2013 to 6.5% in 2015. Well guess what? At that point, pension funds and other fixed income investors who have normally been invested in the utility industry are going to start looking at green bonds and climate bonds which are based on renewable energy projects and energy efficiency projects, because that’s where they can get at least a fairly equivalent return but with a lot less risk.
There’s no risk of investing in a solar plant and then having its cost suddenly explode in the future. Once it is built, that’s it, your cost is sunk the day it goes into operation. The costs aren’t going to go up again. There’s essentially no regulatory risk, there’s no risk to the public. A solar spill is a nice day… so the risk is just so much less in renewables. If the returns from the utility industry are actually falling, we’ve got every reason to believe that this money is going to start looking into green bonds and the climate bonds sector. In fact, it already is. Bond issuance in green bonds jumped from two billion dollars globally in 2012, to 11 billion in 2013. This year it is going to double. We’re probably going to see another 15 billion dollars invested in green bonds this year.