Accelerate the Collapsing of a Fossil Fuel Civilization

Jeremy Rifkin's recent book - The Green New Deal - has a rather headline-grabbing subtitle, "Why the fossil fuel civilization will collapse by 2028 and the bold economic plan to save life on Earth." An immediate question you would ask, "why 2028?" or "how can Jeremy be so sure and exact about the timing?" While he emphasizes the two crucial variables in projecting global future energy supply - growth rate of global energy demand and growth rate of solar and wind supply, there are some "magic" keys for us to know in order to contribute to the acceleration of the paradigm shift.

Creative Destructive

One magic rule is Schumpeter's "creative destruction", which emphasizes the importance of the threshold as the key. When a challenger captures just 3% of the market from an incumbent, the incumbent's sales often peak and begin to decline, signaling its eventual demise. And history seems to show that such a rule "holds across all areas of commerce but is particularly telling when analyzing the transitions in energy paradigms over history."

Carbon Tracker Initiative's Kingsmill Bond has his view of EU's experience and leadership. Europe has gone through 4 stages in its current energy transition. Stage 1 - the initial innovation phase - is where solar and wind climb to provide about 2 percent of electricity. Stage 2 - the peaking phase - is where solar and wind have captured 5-10 percent of the energy market. Stage 3 - the rapid change stage - is where solar and wind comprise 10-50% of the market. And the death knell is where solar and wind cross over to more than 50% of the market.

The Carbon Tracker Initiative has also identified a "magic" number. It holds that the transitional moment is when 14 percent of global electricity will be supplied by solar and wind. EU's 20-20-20 by 2020 strategy puts the continent in an advanced position in renewable energy market and achieved 15% of its electricity generation from solar and wind in 2017. Jeremy reminds us that the fossil-fuel-based power and electric utilities in EU countries collapsed when renewable energies comprises only 14% of total market, leaving a heap of stranded assets behind. Between 2010 and 2015, European electricity sector lost a total of more than 130 billion euros (USD148 billion).

Let's take a look at China and US. China is another shining spot by literally achieving its RE goal of 15% by 2020 now and on track towards 20% by 2030. US had 11% renewable energy in its primary energy structure in 2018. But the future becomes blurry and mixed after President Trump's Affordable Clean Energy replaced President Obama's Clean Power Program.

Stranded Assets

Why are those magic numbers so critical? We all know how investors think and make their decisions. According to Jeremy, as long as their investment shows increasing growth, investors usually stay onboard with the sectors already selected in their portfolios. If the growth loses momentum, they take notice and often lose interest. Investors begin to shift allegiance to the challengers even if they are seemingly inconsequential, if they begin to exhibit accelerating growth or even an exponential growth.

Today, the renewable energy is drastically challenging and disrupting the fossil-fuel dominating energy regime. With solar and wind power generation reaching parity of coal in many parts of the world, sometimes even a lower running costs than the current coal, operating coal- and gas-fired power plants is becoming uncompetitive, forcing utilities to shut them down. Jeremy noted that the consequence will be their capital investment never getting paid off - becoming stranded assets. And in the last few years, stranded fossil fuel assets have become a frequent and crucial issue in corporate boardrooms, financial institutions, government ministries and think tanks around the world.

Bloomberg New Energy Finance studies in 2018 state that "coal and gas are facing a mounting threat to their position in the world's electricity generation mix as a result of spectacular reduction in the costs not just for wind and solar technologies, but also for batteries," and "the economic case for building new coal and gas capacity is crumbling, as batteries start to encroach on the flexibility and peaking revenues enjoyed by fossil fuel plants."

Financial Community Takes Action

Bloomberg's message is a good reflection and summary of the financial community's responses and action worldwide. In its late 2018 study report, Lazard concludes that "we have reached an inflection point where, in some cases, it is more cost-effective to build and operate new alternative energy projects than to maintain existing conventional generation plants." An escalating number of funds is transitioning capital away from fossil fuels and into green energies and the clean technologies of the 21st century.

A 2018 September survey of UK banking sector shows that 70% of UK banks recognized that climate change is now posing a risk to a wide range of assets across almost every field. The surveyed banks represent 11 trillion GBP (USD14.2 trillion) in assets. The IMF Managing Director, Kristalina Georgieva also stated clearly when she first took office last year that one of the two priorities on her agenda is to work with central banks and leading banks of her member governments to figure out how financial community manages climate risks.

Many studies back in 2017 show that the banking system was ill prepared for the barrage of stranded assets coming its way and there generally lacked a sense of urgency about reassessing their approach to current investment decisions. The Task Force on Climate-Related Finance Disclosure (TCFD), now chaired by Michael Bloomberg, was established to support the financial community to weather the upcoming storms, under the Financial Stability Board (FSB), which has 31 members representing large banks, insurance companies, asset managers, pension funds, and accounting and consulting firms.

And TCFD has developed a set of guidelines for financial institutions to model risks and opportunities to mitigate damages caused by stranded assets, as well as to initiate projects more aligned with reducing global warming emissions and prepare the appropriate criteria and data-collecting disclosure information to which companies would need to comply.

Many fund and portfolio managers offer their clients recommendations to divest from (at least) the 200 coal, oil and gas companies with the largest reserves worldwide, because they see the trends and lose faith in International Oil Companies' ability to transition in a financially successful manner, according to Jeremy's book. More than 150 cities and regions across every continent have taken steps to divest their public pension funds from the old fossil fuel energies and reinvest in renewable energies, electric vehicles, and zero carbon emission building retrofits.

From Great Disruption to Significant Opportunities

Recent decades of clean energy technology development have made a promising picture for the transition. According to the Wright's Law, each percent increase in cumulative production in a given industry results in a fixed percentage improvement in production efficiency. So far, wind, solar and battery technologies have all proven the case.

The International Energy Agency estimates that the clean energy transition to a low-carbon economy will require around $3.5 trillion in new investments per year for the foreseeable future in the new energy sector in the coming three decades. Bloomberg New Energy Outlook 2019 defines $13.3 trillion to be invested in new power generation assets over the 32 years to 2050. Of this, 77% goes to renewables. Wind attracts $5.3 trillion and solar $4.2 trillion, and another $843 billion goes to batteries. Investments in new fossil fuel plants doesn’t exceed $2 trillion. This works out to around $416 billion per year. As demand grows, so too does the grid, with distribution and transmission expansion needing an estimated $11.4 trillion to 2050.

Also according the Bloomberg, China sees peak coal generation and emissions in 2027, as the world’s biggest electricity system reaches 37% renewables penetration. And China continues to be the largest market for wind and solar which together grow from 8% to 48% of total generation by 2050.

A global clean energy transition roadmap has been clearly charted to align with the Paris Agreement goal - at least halving emissions by 2030 and achieving net zero carbon emissions by mid century. For some major economies like EU and China, the journey that has been travelled so far lays a solid foundation to accelerate and scale, as well as paradigm shift. US, though uncertain for now, seems also going the same direction.

Financial community, driven by growth prospect and future opportunities, is coming on board to ride the wave. When scientists are alarming us of the urgency of climate change and ecological security; when economists are telling us that early actions costs much less than delayed actions, and when policy makers are aligning their national development plans with their commitments to both Paris Agreement and UN SDGs, technologies, industries and infrastructure become more sophisticated and ready to absorb exponential input of financial capital to accelerate the paradigm shift.

“Never Waste a Good Crisis"!

COVID-19 stimulus packages, being released by major economies, offer an unexpected and unprecedented opportunity that shall not be wasted for a much accelerated clean energy transition. Both fiscal policies and monetary easing provide astronomical amount of liquidity in trillions of dollars, which urgently requires market demands to be created in order to digest such capital and leverage it to create growth potentials and jobs.

As illustrated by Jeremy's Green New Deal and my analysis, we are already equipped with the major numbers, in particular the 14%. We know for sure that the three Elephants in the room - accounting for more about 50% of global economy - are destined to lead global clean energy transition. The only piece of the puzzle unsolved yet is pace - whether we will be able to act quickly enough this decade to reverse the deterioration of both climate change and ecological security.

The stimulus to blunt the continued economic fallouts happens a given opportunity to accelerate. What to invest then?

First, invest in clean energy infrastructure and capacity to enable the scaling and acceleration, such as smart cities, charging stations, smart grids, and more wind and solar energy. Guided by the European Green Deal roadmap and plan, EU is definitely at the play. China's national development plan (13th Five-Year Plan and the current policy discussion of the upcoming 14th Five-Year Plan/2021-2025) provides the clarity of new quality infrastructure as among the top priority focuses in its Stimulus. At this moment, I have not seen a clearly articulated component of clean energy transition in the US USD one trillion stimulus yet.

Second, invest in smart clean energy technologies and industries. The competition among the major economies have been on for a while and I believe that no one would like to miss the chance to sharpen its own leading edges. Part of the reflection in the current pandemic crisis is around the future of global supply chain. For instance, China has been playing the crucial rule in the current global supply chain of pharmaceuticals, from elements provision perspective. This seems a security risk at a time of current pandemic. China has been the manufacturer of renewable energy for most of global market. Will concern over supply chain security gradually change the landscape?

Third, invest in clean energy projects, such as wind energy and solar energy farms, retrofitting building stock to extreme energy efficiency. EU has set its eye on drastically lifting energy efficiency in buildings, so should US, because buildings account for the largest portion of energy use and emissions. China shall ensure highest level of energy efficiency standards for new buildings while financing buildings energy management projects. Low carbon transportation is another market opportunity.

Fourth, invest in education, reskilling and upskilling of labor forces, and talents development for clean energy transition. This concerns future of work and employment, both future talents education and capacity building of existing working forces. When hundreds of millions of students back home are taking online streaming courses, such experiences and innovation offer a great prospect on how to effectively, also cost-effectively, conduct universal education and training.

And fifth, invest in collaboration and partnership, cross sectors, regions and even borders. We are learning many lessons from the COVID-19 pandemic. One of them is global partnership, at a time when crisis usually hits humanity at least every ten years. To weather those storms require global leadership and partnership. Imagine this - if strong and functional global partnership exists so that the outbreak in China was communicated in a timely and transparent manner, both within the country and globally, how many lives would have been saved and how many sicknesses would be been prevented. How would our lives have been much less disrupted and stressed out and how our economies would have remained dynamic?

Here again, we stand at a critical juncture. We don't want to let go such a critical opportunity to get it right for future human sustainability.