JI AN, CHINA – OCTOBER 16: Employees clean up solar panels which will be exported to Sudan at a … [+]
It has become common to argue that the pandemic is not affecting renewable energy (including electric vehicles) as badly as conventional energy, where usage and investment have plummeted. That was the takeaway from the recently published World Energy Outlook (by the International Energy Agency), supported by reports of strong electric vehicle sales, oil companies reorienting towards clean energy, and the oft-cited cheapness of solar and wind energy.
That last has become a new cliché, with advocates often claiming that new solar is cheaper than existing coal plants. Bloomberg New Energy Finance recently said, “Wind and solar power are the cheapest form of new electricity in most of the world today.”[i]
The Guardian newspaper proclaimed that “Even the Oil Giants Can Now Foresee the End of the Oil Age,”[ii] while Jennifer Morgan, executive director of Greenpeace International remarked, “It’s just really important, particularly with the oil industry, to note that this type of volatility that we’re seeing right now, it’s a rehearsal for what climate chaos will bring to the oil market in the future.”[iii] [BP] added that the pandemic would probably “accelerate the pace of transition to a lower-carbon economy and energy system”.[iv]
Not to keep beating a very tired drum, but supreme caution should be exercised in drawing lessons from periods of serious but transient economic disruption and extrapolating them into the future. It’s not clear that the joy of clean air in normally-polluted cities will lead to faster action to clean up dirty power sources. Countries where emissions have dropped during the pandemic have yet to show signs of not restarting their sources of pollution.
But there are overlooked factors that could mean a strong renewables industry is not being driven by long-term trends, so much as the unique conditions of the industry. Specifically, many renewable energy producers have guaranteed sales due to government regulations requiring utilities to buy their production and/or contracts with high take-or-pay clauses, meaning they do not shut down with lower demand. Prices are often locked in, so weak demand has no effect on them. The figure below shows the average retail power price in the U.S. (left hand scale) versus the WTI spot price (right hand scale), and while there is little discernible effect on power prices, oil prices dropped sharply.
Comparative Power and Oil Prices
Electric vehicle sales have apparently not slumped as badly as petroleum-powered vehicles, but since most buyers of electric vehicles are wealthier than the population as a whole, their purchasing power has not suffered as much from the pandemic. (Gabriel Collins of the Baker Institute notes that the average income of a buyer of Telsa’s Model 3 has an income of twice the country’s median.[v])
The argument that the costs of additional renewable capacity are already below that of competing power sources, and in some places lower than power from existing plants, appears to be exaggerated. For one thing, estimates sometimes do not include the cost of storage or surge capacity or the benefits of government subsidies. And costs vary substantially from region to region, not just the strength of incoming sunshine but land and labor expenses, making average global costs misleading.
It is certainly true that China and India, two countries with plans for robust investment in power capacity, have reduced the number of coal plants they intend to build, but they are still building some. The Financial Times reported in June that China’s planned coal plant construction was the highest since 2015,[vi] while Reuters reports that India is cancelling some planned coal plants but 22 GW is still permitted and even more are planned (as of this point).[vii]
The IEA’s latest World Energy Outlook projects that moving from the “Stated Plans” scenario to “Sustainable Development” would mean roughly a 20% reduction in final consumption of energy in the 2030s, but would cost an additional $1 trillion per year in investment during that period. Obviously this ignores the fuel cost for fossil fuels and is not a comparison of costs for energy, and it may be that the economic situation in the 2030s will be much improved (that is, reduced debt and more capital availability).
A Biden Administration is all but certain to continue subsidies for wind, solar and electric vehicles, but, the near-term trend for renewables seems likely to be constrained in most places by the pandemic-driven debt levels and the high capital costs for renewables.
