Carbon Crash Solar Dawn
Cockatoo Chronicles #54
Decades in the making, and still denied by the incumbents, the decline of fossil fuels is imminent. No longer a theoretical future risk, this will be a dramatic market impact in the next decade. While policy can slow or accelerate it, nothing can now stop it. The carbon bubble will burst, the market will respond, and the fossil fuel industry will enter terminal decline. While the industry will still exist in a decade, its decline will be widely accepted and reflected in valuations.
Renewable energy with storage has won for one central reason - the more we use it, the cheaper it gets. That has profound implications, as The Economist argued:
“An energy source which gets cheaper the more you use it marks a turning point in industrial history.”
While the fossil fuel industry still argues there will be strong market demand for oil and gas in 2050 [i], this ignores all the evidence of past disruptions that superior technologies don’t take market share, they take whole markets. They often also destroy the incumbents. So we can ignore their view of themselves. Why would they argue anything else?
Even if such a decline is ultimately inevitable, why now? We’ve had 20 years of forecasts, with many detailed analyses on how this “carbon bubble” [ii] could burst. Yet the industry continues to make record profits and invest hundreds of billions in new exploration and production.
Two critical ideas underpin my conclusion that the time has arrived:
The carbon crash will not occur after demand has dramatically fallen. It will occur when the market believes demand is going to fall - in a timeframe that means current production assets and those under development no longer make financial sense. Hence, the term ‘stranded assets.’ This means passing peak consumption in various sectors and geographies is particularly important. [iii]
Renewable energy, including batteries but particularly solar, is at a critical inflection point where it will grow so fast it will dominate power production. Competitive today, it will keep getting exponentially cheaper and better, with far reaching consequences – some obvious, like driving electrification [iv], and some surprising and yet to be realised.
While I’ve argued for over a decade this was inevitable because the new energy system was based on technology not resources, two new analyses convince me we’ve now reached the key moment.
One was by Kingsmill Bond and the team at RMI who just released an excellent global market summary of how energy technology change occurs and why it is now happening exponentially. They also explain how consistently and dramatically wrong the energy sectors’ own forecasts have been.
The other was a special issue of The Economist which overviewed the extraordinary rise and future growth of solar:
“The exponential growth of solar power will change the world - An energy-rich future is within reach.”
To quote The Economist: “To call solar power’s rise exponential is not hyperbole, but a statement of fact. Installed solar capacity doubles roughly every three years, and so grows ten-fold each decade. Such sustained growth is seldom seen in anything that matters. That makes it hard for people to get their heads round what is going on. …. The next ten-fold increase will be equivalent to multiplying the world’s entire fleet of nuclear reactors by eight, in less than the time it typically takes to build just a single one of them.”
They explained that what makes solar energy revolutionary is the rate of growth. In 2004, it took the world a year to install a gigawatt of solar-power capacity, in 2010 it took a month, in 2016 a week. In 2023 it happened on some single days and 2024 forecasts suggest it may soon be every 12 hours.
The key to this, and to it continuing, is that solar is a manufactured technology product rather than a physical resource. This means growth drives lower costs, which drives more growth, which drives lower costs, which… etc. Since the late 2000’s solar’s costs have dropped 40% for each doubling of installed capacity. And this is not mobile phones, this is energy which underpins every economic sector. As The Economist says: “It will be the steepest drop in the price of one of the basic factors of production that the world economy has ever seen.” … The more we use it, the cheaper it gets…
This is indeed, as The Economist said, “going to be huge” but it was actually the RMI Clean Tech Revolution report which explains why the revolution underway is even more significant. I will summarise RMI’s key points, but I strongly urge you to read it.
The energy system is being transformed by exponential forces underway in renewables, electrification, and efficiency.
The orthodox view of slow change is wrong. Incumbents continually come up with new theoretical barriers, but the drivers of growth are so powerful they have proven them wrong, again and again. “There are always barriers to change. Those who solve them get rich.”
While the growth in cleantech over the past decade has been remarkable and exponential, the most remarkable thing is that this will continue exponentially.
Rapidly reducing costs could be revolutionary for poor countries. If rich countries provide the finance, poor countries could leapfrog in energy - the key enabler of economic and social progress.
Global change is being led by China which may become the first “electrostate”. While the Western media focuses on the issue being subsidies, China sees national and global economic opportunity and is pursuing it aggressively.
This continuing exponential growth in clean tech raises red flags across the fossil fuel system. With some 75% of fossil fuel demand exposed to rapidly growing cleantech alternatives, the conclusion can only be the terminal decline of fossil fuel energy.
We have entered the ‘pivot decade’ with the transition being priced into markets. This will be messy, with decline always triggering market volatility and, in this case, large geopolitical consequences.
With the industry proven to be incapable of accurate forecasting, and so constantly building for growth, stranded assets are inevitable. Given the fossil fuel system has around $50 trillion of fixed assets, stranding just a proportion has profound implications.
All this tells me that the ‘carbon crash and solar dawn’ is now inevitable. This is huge in its historical significance and the implications for climate action. However, we should recognise that this will not ‘fix’ climate change. Climate change is a genuine emergency and existential threat to global economic and geopolitical stability. This means speed is the overwhelming priority for both methane and CO2 reductions, with methane particularly critical to slowing the rate of warming.
Left alone, the market will not get us there in time. Policy remains critical. But what these two analyses show is that we can now choose to decarbonise the energy system rapidly while also delivering profound economic, ecological and social benefits. As RMI concludes: “We are in a race between climate and economic tipping points. The direction is inevitable, but speed is up to us.”
Notes
[i] Aramco CEO Amin Nasser said “A transition strategy reset is urgently needed and my proposal is this: We should abandon the fantasy of phasing out oil and gas and instead invest in them adequately reflecting realistic demand assumptions,”
OPEC Chief Haitham Al Ghais called for “continued oil industry investment, today, tomorrow, and many decades into the future given the products derived from crude oil are essential for our daily lives.”.
Shell’s CEO Wael Sawan said “there is going to be a multidimensional energy system in the future, [and] oil and gas will continue to have an important role in stabilizing that system for a long, long, long time to come.”
[ii] The best and most comprehensive analysis of this issue has come from the financial thinktank Carbon Tracker who popularised the ‘Carbon Bubble’ term. This describes the scenario that will occur when the market perceives the value of fossil fuel assets to be much less than what they’re priced at. At this point various assets which underpin company valuations today, including production facilities, ports, exploration equipment and fossil fuel reserves become ‘stranded assets’.
[iii] RMIs Cleantech Revolution report details the peak in fossil fuel demand across different sectors on slides 26-36. They also argue that once we pass peaks we tend to see rapid declines in demand. For more information can also see RMI’s ‘Peaking: The Series’ at: https://rmi.org/peaking-the-series/
[iv] A number of economic activities that are inherently more efficient and operationally superior using electricity are not converted due to the capital costs of doing so. However, as electricity gets cheaper to produce there is a point where the capital cost is so well justified by the return it becomes irresistible on economic grounds alone. This then drives momentum for others to follow to maintain cost competitiveness.