As Al Gore said at the opening of COP 27 in Sharm El-Sheikh in November, we cannot choose our misfortunes, but we can choose the benefits that come from them, especially when it comes to renewable energy. Indeed, we are in the early stages of a sustainability revolution that will have the scale of the industrial revolution and the speed of the digital revolution.
The former US Vice President also pointed out that every dollar spent on renewables creates 3 dollars worth of jobs, making such investments massively deflationary.
Fossil fuel prices are volatile
As can be seen from the graph below, the price of gas depends on largely unpredictable geopolitical factors which make it highly volatile, as it can go from less than USD 2/million Btu to more than USD 14 in a few months. [Btu = British thermal unit; 1 million Btu/hr = 293.07 kW]
It is therefore impossible for consumers to predict the amount of their next bills reliably.
In contrast, the price of photovoltaic (PV) panels has been falling steadily since they were first produced and has dropped by 99.6% since 1976!
Unlike fossil fuels, whose price rises when demand increases, the price of solar panels falls by 20.2% each time the installed capacity doubles. We are therefore in a virtuous circle where the more panels are installed, the cheaper they become.
Renewables are deflationary by nature
There are several reasons why solar and wind are inherently deflationary energy sources. Firstly, both resources – solar and wind – are unlimited, which prevents prices from rising due to demand. Secondly, renewables are primarily “technological”, which makes economies of scale, price reductions and efficiency improvements possible. Moreover, the cost of renewable energy is largely infrastructure-dependent, with virtually no marginal costs. Finally, improvements in electricity storage technologies greatly improve efficiency by allowing 24-hour use.
The combination of these different factors has led to a sharp drop in the cost of clean energy, which is now lower – excluding subsidies – than that of other forms of energy, as shown below.
The attractiveness of solar energy is even greater if we consider it not just in absolute terms but in relative terms compared to natural gas, which has increased dramatically.
The relative price is going to become more and more advantageous
And this trend is not about to stop. Indeed, given the limited reserves available on our planet, the rise in the price of fossil fuels will continue unabated in the long term. The same phenomenon will be observed with regard to the price of electricity generated by thermal power stations. These cannot meet demand due to a lack of resources in Europe and grid obsolescence in the US. For its part, LNG, given the increasing costs of transport and regasification, is not likely to see its price fall either.
However, there are a few clouds in the blue sky. Electricity grids will require huge investments to improve their reliability. It will also be necessary to increase the speed of transmission to enable the electrification of transport. Furthermore, the variability of renewable electricity generation places additional stress on electricity grids, with costs per user increasing as consumers leave the grid to become energy self-sufficient.
Increasingly cost-effective projects
As a result of these developments, new renewable energy projects benefit from a more competitive cost of capital and lower required returns. As can be seen in the graph below, this is the opposite of the trend for offshore oil or LNG projects.
Whether it is wind or solar, the technology is now mature and these energies will certainly see an acceleration in their development.
Increasingly decentralised production
This acceleration will be accompanied by a growing trend towards decentralisation, i.e. the production of energy directly by consumers. Two factors are contributing to this development. Firstly, the installation of panels on the roofs of private individuals and companies – and thus decentralised production – is subject to subsidies or tax credits, both in the USA and in Europe. The aim is to increase the proportion of self-generated electricity to 20%. In the US, the IRA will accelerate the uptake of renewables by providing greater visibility and financial benefits. These benefits can be further increased if projects are located in disadvantaged areas.
In addition, technological advances in batteries and inverters have made their discounted cost (LCOE) very affordable, whereas it was previously very expensive. For example, in the US, the price of grid electricity is on average USD 0.166 per KWh (and can even reach 0.345 in Houston, Texas), while solar electricity costs half that (USD 0.08 per KWh).
The tipping point has already been reached
Thanks to their relative advantage, clean energy reached the tipping point in 2021, when its share of the global energy mix (38.5%) reached that of coal (38.6%).
Source : Ember electricity generation data, IEA Net Zero by 2050: clean includes: wind, solar, hydro, nuclear, other renewables and bioenergy, 2021
With these deflationary benefits, it can be expected that the movement will quickly snowball and accelerate.
To conclude, we can quote Al Gore again at COP 27: “Last year, 90% of the new electricity generation capacity installed in the world was renewable, because it was cheaper almost everywhere. In two years’ time, that will be the case everywhere in the world”.